International rating agency S&P Global on Monday affirmed credit rating of state-run Indian Overseas Bank (IOB) at 'BB' and 'B' on expectation of government's capital infusion.
The lender's outlook has also been kept stable.
The bank breached its regulatory capital requirements after a loss in the third quarter of FY19.
Its tier-I capital ratio was 6.95 per cent below the minimum regulatory requirement of 7 per cent.
It's capital shortfall to meet that regulatory minimum was about Rs 62.5 crore as of December 31, 2018.
"We expect IOB to receive substantial capital from the government before the end of this fiscal year in March 2019 to materially improve the bank's headroom above the regulatory minimum tier-I capital ratio of 7 per cent," the rating agency said in a note.
The bank's capital position improved in Q4 of FY19 through an employee stock purchase scheme (ESPS) and sale of non-core assets for which it has received initial payment.
The agency said any lengthy delay in capital infusion from the government may leave the bank unable to meet its regulatory capital requirement at fiscal year-end.
"As a result, we would likely to lower the issuer credit rating by at least two notches," the agency said.
The bank made improvements in the past few quarters on parameters such as operating profits, cost efficiency, and growing low-cost deposits, among others.
The agency, however, said it expects the bank to make losses in the current fiscal year.
It said the bank's poor asset quality reflects weakness in its underwriting standards and aggressive growth in the past.
The agency said it could lower the rating on the bank by at least two notches if capital support is delayed or the capital injection is lower than our expectation.