Capital requirements of PSU banks for provisioning of bad loans are likely to shoot up exposing them to possible downgrades, S&P said today as it trimmed outlook on Bank of India to 'negative' from 'stable'.
It also put Indian Overseas Bank on 'CreditWatch' with negative implications.
Standard & Poor's Ratings Services said the PSU lenders are in a weaker position on the capitalisation front than their private sector peers and may find it difficult to raise capital given their weak performance.
"Any sharp deterioration in asset quality could further weaken banks' credit profiles," S&P said in a report.
Hit hard by mounting bad loans, many leading state-owned banks, including Bank of India (BoI) and IDBI Bank, reported their highest ever quarterly losses totalling over Rs 12,000 crore, while banking majors like SBI and PNB witnessed sharp erosion in profits.
The Reserve Bank has asked banks to recognise select weak loans as non-performing loans over the quarters ending December 2015 and March 2016, and shore up provisioning.
The US-based agency has retained 'negative' outlook on the ratings of Syndicate Bank.
Revising the outlook on BoI to negative, S&P said it expects its asset quality to continue to weaken over the next 12-18 months, further straining the bank's capitalisation and profitability.
As regards IOB, it said a 'CreditWatch' with negative implication stems from S&P's expectation that mounting losses would strain the state-run lender's capital base.
With regard to IDBI Bank, S&P affirmed its rating with a stable outlook saying there were high expectations of capital support from the government.
S&P credit analyst Deepali Seth said: "In our view, Indian public sector banks may find it difficult to raise capital, given their currently weak operating performance, which makes it difficult for them to access the equity capital markets."
These banks will therefore have to rely more on government support for capital infusions, Seth said.
S&P said it would see if the government infuses a large chunk of the Rs 45,000 crore earmarked for capital infusion in banks over fiscal years 2017-2019, in the current year itself.
"Over the longer run, the tighter NPL norms will improve transparency in the Indian banking system and bring them more in line with global practices. They will also pave the way for much-needed reforms in risk management and governance of banks," S&P said.
Meanwhile, stock price of public sector banks today fell by up to 6.5 per cent. State Bank of India tumbled 6.49 per cent, Oriental Bank of Commerce 5.89 per cent, Punjab National Bank 5.60 per cent, Union Bank of India 5.50 per cent, Bank of India 4.30 per cent and Allahabad Bank 3.75 per cent on BSE.
Among others, Central Bank of India fell by 3.66 per cent, IDBI Bank was down 2.79 per cent, Dena Bank lost 2.10 per cent and United Bank of India 1.37 per cent.
Consequently, the BSE bank index fell 2.11 per cent to end at 16,081.69.