Rating agencies flag concerns over PSBs' performance

CRISIL warns of more rating downgrades for banks

Public sector banks (PSBs) might be headed for rating downgrades with many of them reporting net loss in the December 2015 quarter owing to a sharp rise in provisions for bad loans, according to rating agency CRISIL.

Issuing ‘credit alert’ on PSBs, CRISIL said these banks’ asset quality problems could impair their credit risk profiles.

The PSBs’ earning profile would also deteriorate owing to higher provisioning and these lenders would need more capital than budgeted in the Indradhanush programme.

Indradhanush is a capital revamp plan for PSBs, under which Rs 70,000 crore capital would be infused into these banks over a four-year period.

PSBs require significantly higher capitalisation either through government infusion or relaxation of regulatory capital norms, CRISIL said in statement on Wednesday.

‘Credit alert’ is an opinion on a sharp and specific development. It means that the agency will revert shortly on the impact of the development on the ratings of those affected.

Over the past 18 months, CRISIL has either downgraded or revised its outlook to ‘negative’ on nine out of the 25 PSBs that it rates on the back of expectations of worsening asset quality.  Vibha Batra, senior vice-president & co-head of financial sector rating at ICRA, said the quantum of loss reported by some state-owned banks was large. The capital adequacy is low and profits are thin. The agency would review portfolio of rating (of banks). As much as 85 per cent of the banking system’s weak assets are in the books of PSBs. Increasing stress is also visible in the quantum of strategic debt restructuring and 5/25 structuring being carried out by banks, CRISIL said. In May 2015, the rating agency had estimated weak assets in banks to rise to a high of around Rs 5.3 lakh crore or 6.3 per cent of total advances by March 2016.  

However, the deterioration in asset quality in the first nine months of FY16 has been faster than expected. Among the key factors driving deterioration are tumbling global commodity prices, the inability of the leveraged players to sell assets, and identification of stressed assets under the Reserve Bank of India’s asset quality review.

As a result, the provisioning requirement of PSBs will increase further and render their pre-provisioning profits inadequate. The government will have to step in and provide more capital than what was committed under the Indradhanush programme.

“We will be looking out for government announcements for such measures, including in the upcoming Union Budget. If that doesn’t happen, CRISIL’s threshold of ‘high safety category’ for PSBs could get lowered,” said Pawan Agrawal, chief analytical officer at CRISIL Ratings.

According to Ananda Bhaumik, managing director and chief analytical officer at India Ratings, the adverse performance of PSBs builds pressure on the government for timely and enhanced support.