Standard & Poor's today said the rating of Indian Overseas Bank (IOB) could face downward pressure if the corrective action taken by RBI results in weakening of the bank's credit profile.
RBI has taken "prompt corrective action" with a view to improving internal processes to deal with mounting non-performing assets of the bank.
In a statement, Standard & Poor's Ratings Services said RBI's action highlights the weak credit profile of IOB, but there will be no immediate impact on its rating.
"The ratings on IOB could face downward pressure if the prompt corrective action results in any weakening of the bank's business or credit profile. We could also lower the rating on IOB if the bank's risk-adjusted capital ratio declines to less than 5 per cent," S&P said.
This ratio could decline if IOB is unable to raise sufficient capital to support growth as economic risk in India rises.
S&P had lowered IOB's stand-alone credit profile a notch to 'bb-' on September 30, 2015, to reflect the weaknesses.
It said the assessment of IOB's stand-alone credit profile already factors in the bank's inherent weakness in asset quality, moderate capitalisation, and ongoing stress on earnings.
"Our ratings on IOB continue to reflect our expectation of a very high likelihood that the Indian government will continue to provide extraordinary support to the bank. IOB's performance has been weak over the past year or so," it said.
The bank's aggressive growth over the past several years has put its internal control system under stress.
The non-performing loan ratio rose sharply to 9.4 per cent as of June 30, 2015, from 5.8 per cent as of June 30, 2014, to become the highest among the rated Indian banks, S&P said.
High credit costs have strained IOB's earnings, which remain abysmally low. Moreover, IOB's funding profile has deteriorated over the past few years.
"We will continue to closely monitor the development around the prompt corrective action on IOB," S&P said.
