Despite the recent relaxation of capital regulations by the RBI for computing capital ratios, Crisil believes that the equity capital of `70,000 crore that the government plans to provide to state-run banks over a four-year period will not be adequate. Photo: Pradeep Gaur/Mint
Despite the recent relaxation of capital regulations by the RBI for computing capital ratios, Crisil believes that the equity capital of `70,000 crore that the government plans to provide to state-run banks over a four-year period will not be adequate.
Photo: Pradeep Gaur/Mint

Crisil downgrades eight public sector banks

Crisil downgrades its ratings of Bank of India, Central Bank of India, Corporation Bank, Dena Bank, IDBI Bank, Indian Overseas Bank, Syndicate Bank and Uco Bank

Mumbai: Ratings agency Crisil Ltd has downgraded its ratings on the securities of eight public sector banks (PSBs) and changed the outlook on instruments of five other lenders to negative.

In a statement on Thursday, Crisil said it has downgraded its ratings of Bank of India, Central Bank of India, Corporation Bank, Dena Bank, IDBI Bank, Indian Overseas Bank, Syndicate Bank and Uco Bank. The agency also changed the outlook, to negative from stable, on certain securities of five other banks—Andhra Bank, Bank of Baroda, Canara Bank, Punjab National Bank and Punjab and Sindh Bank.

The securities considered for revision in rating included Tier-II infrastructure bonds, hybrid instruments under Basel II guidelines, Tier-I bonds under Basel III, fixed deposits and certificate of deposits.

“Significant stress in the corporate loan book of PSBs is expected to result in their weak assets ballooning to 7.1 lakh crore by March 31, 2017 (11.3% of total loan book) from around 4.0 lakh crore as on March 31, 2015 (7.2% of loan book)," Crisil said in a statement.

Over the next few quarters, the ratings agency expects slippages to non-performing assets (NPAs) in banks to remain high, driven by stretched cash flows of highly leveraged companies, continued proactive recognition of stressed assets by banks and the limited ability of banks in the current environment to recover exposures to large corporates that have slipped into NPAs.

In addition, margins may also come under pressure as banks move to a new rate setting system based on the marginal cost of funds compared to the average cost of funds they currently use.

“With the banking system having to migrate to the marginal cost of funds-based lending rate, or MCLR, regime from April 1, 2016, and the proportion of zero income-generating bad assets in the loan book of PSBs rising, net interest margin will come under fresh pressure in the near-term," Crisil said.

Despite the recent relaxation of capital regulations by the Reserve Bank of India (RBI) for computing capital ratios, Crisil believes that the equity capital of 70,000 crore that the government plans to provide to state-run banks over a four-year period will not be adequate.

“This is because the Tier 1 capital requirement for PSBs, upto 2019 has increased from our earlier estimate largely on account of sharp decline in their profitability," Crisil said.

In February, ICRA Ltd had also said that it had revised the outlook on papers of four public sector banks including Bank of India, Central Bank of India, Indian Overseas Bank and UCO Bank.

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