Rating outlook on three improved citing likely funding support from the Centre.

Even before the government finalised the capital infusion plan for public sector banks (PSBs), rating agency Crisil On Thursday upgraded ratings on eight of these banks and improved the outlook on three.

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“These rating actions were based on Crisil’s reassessment of the support PSBs were likely to receive from their majority shareholder, the government of India (GoI), in the wake of GoI’s recent steps and pronouncements,” Crisil said in a statement. Following the reassessment, ratings on the lower Tier-II bonds of PSBs, which earlier ranged between AAA and AA- was revised to AAA and AA.

The ratings on the hybrid instruments issued by these banks were also revised, Crisil said in a statement (see table). In June last year, Crisil had lowered the outlooks and not ratings based on standalone performance.

Apart from the immediate impact in terms of lower cost of fund raising, the bonds issued for capital infusion into these banks would carry better rates and reduce the burden for interest payment, banking sources said.

The agency cited the government’s statement of intent in the Budget — which was a reiteration of the stand taken by the United Progressive Alliance’s National Common Minimum Programme of 2004 — to retain at least 51 per cent stake in public sector companies, including banks and insurance companies.

Crisil’s statement On Thursday pointed out that the government was earlier evaluating the option of reducing its minimum shareholding in banks to 33 per cent while retaining management control. Government officials, however, said that thinking on these lines had stopped at least five years ago, when the Bill to amend the law governing PSBs, moved the National Democratic Alliance government, was allowed to lapse.

The first statement on capital infusion came soon after the global credit crisis intensified, though there was little impact on Indian banks. P Chidamabaram, the then finance minister, announced the government’s intent to provide capital to these banks so that they had at least 12 per cent capital adequacy ratio.

However, Crisil waited until now to revise the ratings as Tarun Bhatia, head, Crisil Ratings, said, “What it had stated last year, got demonstrated in March (when capital infusion took place in three banks), which gave us the comfort. It was further supported by the government’s clear articulation in the Budget.”

While the government has been mentioning capital infusion into a majority of PSBs since October, and has also initiated talks with the World Bank for a loan, it did not announce details in the Budget.

“The government has, additionally, reiterated that it would take appropriate measures to maintain capitalisation in PSBs around 12 per cent, so that these banks could grow and remained competitive. In 2008-09, GoI infused Rs 1,650 crore into three PSBs; it was committed to infusing Rs 2,150 crore more by September-end,” Crisil said.

“These measures represent a stronger and more specific articulation of GoI’s intent than in the past. This articulation is a key factor in Crisil’s reassessment of the expected support… We now see evidence of an enhanced degree of GoI support to the banks, following the pronouncements in the Budget,” said Raman Uberoi, senior director at Crisil Ratings.

While rating PSBs, Crisil factored in the expectation of government support, the statement said. It also said that Indian banks were adequately capitalised and despite an expectation of deterioration in the asset quality of the banking sector in 2009-10 and 2010-11, the capital profile of these banks was robust enough to withstand the challenge.

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