Days after downgrading India's sovereign ratings, global credit ratings agency Moody's Investors Service said on Wednesday that the quality of retail and SME loans will also deteriorate.

Elaborating on the key drivers behind India's sovereign downgrade, it said that the risks to the financial system are rising.

Some sectors were already under strain before the coronavirus outbreak. For NBFIs, both assets and liabilities will come under a strain in the near term, this is about 10-15% of bank loans. 

Private power sector exposure is about 8-10% of bank loans. In the auto value chain, the most exposed banks are the private sector banks.

It said that now the quality of retail and SME loans will also deteriorate, which account for 44% of the total loans.

Moody's Investors Service has said that policymaking institutions face increasing challenges from lower growth, weaker fiscal conditions and rising financial sector stress.

It said that the risks to the financial system are rising. "Our rating action signals downward pressure on the ratings and standalone assessments of most rated banks," it said.

"Over 80 per cent of rated non-financial companies have negative outlooks or are under review for downgrade. Two-thirds of the rated infrastructure portfolio has a negative bias," it said.

The agency pointed out that India's debt burden remains high as compared to its peers and the deficits have fallen short of FRBM targets.

The slowdown in India was evident before the coronavirus outbreak, it said, as factors were evolving before the pandemic and the risks were rising since November 2019.

The mutually reinforcing risks from weak economy and strained financial system are driving downside risks. Increasing challenges for policymaking institutions, it has flagged as slower reform momentum hinders effective implementation, pointing to the drivers of the rating action. There has been a prolonged period of slower growth, Moody's said.