Mumbai: Credit ratings of public sector lenders have come under the scanner after most of them reported large losses for the December quarter on the back of a surge in bad loans and provisioning.

Global rating agency Standard & Poor’s (S&P) on Tuesday downgraded the rating outlook on Bank of India and placed Indian Overseas Bank (IOB) on credit watch, with negative implications.

S&P added that the ratings of these banks could get downgraded if the expected capital infusion from the government does not materialize and, in the case of IOB, the tier-I capital falls below regulatory requirement.

IOB’s rating could get downgraded by multiple notches to CCC+, a non-investment grade rating, from the current BB+ long-term rating, S&P said.

IOB posted a loss of 1,425 crore for the December quarter on the back of a 21% sequential rise in provisions.

In October, the Reserve Bank of India called for corrective action at IOB to check bad loans, improve internal controls and consolidate its business activities as the bank’s gross non-performing assets surged to 11% of its loans for the September quarter.

“Our rating action reflects our expectation that IOB’s mounting credit losses have strained its capitalization and make it more onerous for the bank to meet the minimum regulatory capital requirement by March 2016," S&P said in a release on Tuesday.

The rating agency will review the move within four months for a possible downgrade if capital infusion by the government does not materialize.

For Bank of India, the rating agency expects earnings to remain weak for the next 12-18 months but the intrinsic government support reflects in the current rating of BBB-, S&P said.

Bank of India posted a quarterly loss of 1,505 crore for the December quarter after it had to provide 3,603 crore towards bad loans. The lender saw its gross non-performing assets ratio rise to 9.2% of total loan stock for the quarter.

S&P affirmed the long-term rating of BBB- on the bank but said that the potential deterioration of asset quality has prompted a negative outlook.

“We revised the outlook to negative because we expect Bank of India’s asset quality to continue to weaken over the next 12-18 months, further straining the bank’s capitalization and profitability," the rating agency said in a release on Tuesday.

Bank of India’s credit costs are likely to remain high because of continued pressure on asset quality, given the tough operating conditions for the corporate sector in India. About 70% of the bank’s loans are in the domestic market, and about 71% of these loans are to the corporate and micro, small and medium enterprise segments, the rating agency said.

However, notwithstanding a surge in gross non-performing assets and a quarterly loss, the long-term issuer rating of IDBI Bank was kept unchanged at BB+ with a stable outlook. “The rating affirmation reflects our expectation that the likelihood of support to the bank from the government of India will remain very high," S&P said.

The agency said that the rating may be lowered if the bank’s asset quality weakens significantly and its gross non-performing assets rise to 10-12% of its loans or its stressed assets rise to 18-20% of its advances.

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