The proposed merger would have provided a vote of confidence on governance, Moody's said.

Global credit rating agency Moody's has downgraded the corporate family rating (CFR) and the foreign-currency senior secured rating of Indiabulls Housing Finance Limited to B2 from Ba2, after the Reserve Bank of India rejected its proposed merger with Lakshmi Vilas Bank earlier this month.

According to Moody's rating rationale, the downgrade was driven by Indiabulls' ongoing challenging access to funding.

"The proposed merger with Lakshmi Vilas Bank would have provided a vote of confidence on governance, as it would have meant that the company passed the regulator's fit and proper criteria for becoming a bank. Hence, the rejection by the Reserve Bank of India of this proposal on October 9 is a credit negative," Moody's said.

Besides, the rating agency reasoned that the "governance considerations were also a key driver of this rating action. The company's access to funding remains challenging. The continued decline in on-balance sheet loans is a reflection of its funding challenges."

The agency also said that "while access to funding remains challenging, its pool of liquid assets, ability to run down the loan book and roll over of its bank funding act as a buffer against this risk in the short-term. However, as the funding challenges prolong, the liquidity buffers may erode and expose the company to funding and liquidity risks."

"This is the key driver of the rating action," Moody's said.

Perceptions of weak governance, Moody's said, have an impact on the credit profile by impeding access to funding. This is particularly so in the current context as there has been an increase in lenders' risk aversion towards finance companies following the default of IL&FS in September 2018.