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The rating agency also downgraded various debt instruments of the bank.
Reserve Bank has recently initiated 'prompt corrective action' for the bank on account of higher NPAs and negative return on assets.
"The downgrade in the long-term issuer rating reflects the consistent drop in IDBI's share of systemic assets as the bank struggles with its asset quality challenges," the rating agency said in a note here today.
It said the bank continues to grapple with a weak capital profile and the RBI's invocation of prompt corrective action framework would continue to weigh on its share of systemic assets and liabilities.
The bank's credit costs is likely to remain significantly high over the medium term, on account of higher fresh slippages and provisioning requirements on the current stock of stressed corporates, the agency said.
The rating downgrade of AT1 bond and upper Tier II subordinated debt reflects the structural weakening of the bank's standalone profile, likely elevated levels of credit costs, significant erosion of capital, limited visibility on capital infusion and the bank's inability to timely garner equity capital by monetisation of its non-core assets.
The rating agency further said the negative outlook on the bank reflects the high possibility of the lender reporting its common equity tier I below the minimum regulatory requirement and continuously struggling with its core capitalisation level in the absence of a significant capital infusion from the government.