Following the biggest scam in the country's banking sector to the tune of Rs 113.4 billion at state-run Punjab National Bank (PNB), Moody's today placed the lender under review for downgrade.
The agency has a Baa3/P-3 rating on the Delhi-based lender now while it has a Baa3 rating on its foreign currency issuer rating. The bank overall has a Baa2 rating with a stable outlook now from Moody's.
The review for downgrade will focus on: (1) the timing and quantum of the financial impact of the fraudulent transactions, (2) any management actions taken to improve the capitalization profile of the bank, and (3) any punitive actions taken by the regulator on the bank, Moody's Investor Service said.
It has also placed the bank's baseline credit assessment (BCA) and adjusted BCA of Ba3 and the counterparty risk assessment (CRA) rating of Baa3(cr)/P-3(cr) under review for downgrade.
"The primary driver for today's rating action is the risk of weakening standalone credit profile of PNB, as a result of a number of fraudulent transactions" through fake letters of undertakings issued by the bank to other lenders worth USD 1.8 billion over the past many years, Moody's said.
The scam came out into the open on 14 February 2018, when it informed the stock exchanges.
"These fraudulent transactions represent a contingent liability and the financial impact will be determined by the relevant laws. Nevertheless, we expect PNB will need to provide for at least a substantial portion of the exposure.
"As a result, the bank's profitability will likely come under pressure, although the actual impact will depend on the timing and quantum of provisions that need to be made, as well as any prospects for recovery," the agency said.
The fraudulent transactions represent about 230 basis points of the bank's risk-weighted assets as of December 2017.
As such, its capital position would deteriorate markedly, and fall below minimum regulatory needs, if the bank is required to provide for the entire exposure, it said.
Consequently, PNB may need to raise capital externally, mainly from the government, to comply with the minimum Basel III capital requirement of 8 per cent common equity tier 1 (CET1) ratio by March 2019.
The bank reported a CET1 ratio of 8.05 per cent in the December 2017 quarter. Since the announcement of the fraudulent exposure, PNB's share price has fallen by about 30 per cent, limiting its access to the equity capital markets.
The discovery of the fraudulent transactions also highlights the weak operational controls and corporate governance at the bank.