PSBs risk further downgrades: S&P

Standard & Poor's (S&P) on Tuesday said the capital that public sector banks would need to set aside upfront for bad loans was likely to shoot up, leaving them exposed to possible downgrades.

"We believe Indian public sector banks are in a weaker position on the capitalisation front than their private sector peers," said S&P's credit analyst Deepali Seth in a report.

It warned that many public sector banks could face deterioration in their stand-alone credit profiles (SACPs) and downgrades if these were unable to raise the required capital over the next few months. The lenders could then breach the regulatory minimum capital requirement or their risk-adjusted capital (RAC) ratio might deteriorate.
 

Any sharp deterioration in asset quality could further weaken banks' credit profiles. "We have a negative outlook on the ratings on Syndicate Bank and Bank of India, while we have Indian Overseas Bank on CreditWatch with negative implications," S&P said.

Additionally, downside risk for IDBI's SACP was rising on account of its weak asset quality and consequent deterioration in capital.

The Reserve Bank of India had advised banks to recognise select weak loans as non-performing loans (NPLs) over the quarters ended December 2015 and March 2016, and shore up provisions for bad loans. The increase in NPLs and the higher provisioning had led to a sharp fall in profitability - and in several cases losses - for many Indian banks in the quarter ended December 2015."

"Indian public sector banks might find it difficult to raise capital, given their currently weak operating performance, which made it difficult for them to access the equity capital markets," said Standard & Poor's credit analyst Deepali Seth.

These banks would, therefore, have to rely more on government support for capital infusions. The agency will watch the government's approach to increasing outlay for capital injection.