According to India ratings and Research, adequate capitalisation is critical for banks to mitigate concentration risks arising out Supreme Court order on coal block allocation.
"We expect most private sector and large public sector banks (PSUs) to be better placed in handling credit costs arising out of this development with sufficient operating and capital buffers," the report said.
However, 10 mid-sized PSU banks will be affected the most with their thin operating margins and weaker capitalisation, the report added.
While the large PSUs (State Bank of India, Bank of Baroda, Bank of India, Canara Bank and Punjab National Bank) account for 46 per cent of this exposure compared with 39 per cent for the 10 mid-sized PSUs, in terms of assets, the risk is much higher for the latter group, the report said.
Ind-Ra expects private sector banks and large PSU banks to manage potential credit costs more effectively than mid-sized PSUs due to their better operating buffers.