Weak state-run banks like Indian Overseas Bank, IDBI Bank, Bank of India and Union Bank of India are in for regulatory action if the tightened prompt corrective action (PCA) is implemented properly, warns S&P in a report. “If the norms were applied to reported numbers for December 2016, among the banks rated by us, Indian Overseas Bank is in risk threshold 3; IDBI Bank is in risk threshold 2; and Bank of India and Union Bank of India are likely be in risk threshold 1;” S&P credit analyst Geeta Chugh said today.
She also said the revised PCA, released last week by the Reserve Bank invests a lot of powers on the regulator to supersede the troubled banks, may trigger faster consolidation among the bad loan saddled state-run banks or higher capital infusion by the government.
“Our ratings on the banks factor in weak stand-alone credit profiles of ‘B-‘ on IOB and IDBI Bank, and ‘BB’ on Bank of India and Union Bank. The ‘BB’ issuer credit ratings on IOB and IDBI Bank and ‘BB+’ issuer credit ratings on BoI and UBI continue to benefit from the very high likelihood of government support,” Chugh said.
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Welcoming the new guidelines, she said “we believe the Reserve Bank is taking a step in the right direction and the new regulations will force public sector banks to raise their generally low provisioning coverage, and likely accelerate the need for capital.”
The revised norms may not necessarily be effective as early warning signals amid the current industry downcycle, she said and noted that a number of public sector banks are already knee-deep in NPAs and firmly entrenched within the new risk thresholds.
She further noted that the PCA measures such as restrictions on dividend distributions or branch expansion will have limited benefit because most banks didn’t pay any dividends in fiscal 2016 as they are conserving capital. Also, most of them have shown little growth, and in many cases have contracted their balance sheets.