Bank stress: rating agencies warn of likely downgrades

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Mumbai, Aug 18: After braving RBI’s tight monetary regime to curb double-digit inflation, domestic banks now face possible downgrades by rating agencies. S&P subsidiary Crisil, Icra (in which Moody’s has a stake), Fitch Ratings and Care Ratings have all launched a review of domestic banks with a view to undertaking possible downgrades. “Fitch is in the process of reviewing the ratings of 20-22 state-owned banks and 10-12 private and cooperative banks,’’ confirmed Fitch Ratings India managing director Amit Tandon.

Rating agencies reckon that continued monetary tightening as well as deteriorating asset quality and profits will squeeze domestic banks in the months ahead. Ananda Bhoumik, senior director, Fitch, said, “Although it’s not a crisis-like situation, the picture isn’t rosy for the Indian banking sector going forward. Banks that are growing aggressively or are mid- or small-sized are expected to come under severe stress. Their current equity levels or their ability to raise capital would play a very decisive role in the future.”

Fitch has already announced ‘negative outlook’ ratings for state-owned UCO Bank and private sector Laxmi Vilas Bank in recent months, and also downgraded state-run Vijaya Bank last week. “The next 12-18 months are going to be extremely crucial for the Indian banking sector,” added Bhoumik.

Any downgrade will particularly hit private sector banks planning to raise debt, hybrid capital or even equity, either domestically or in international markets. Besides, the ability to raise deposits could be impacted if ratings are lowered. The inter-bank market also takes note of such changes. For state-owned banks, however, the sovereign guarantee would neutralise much of the negative impact.

Tarun Bhatia, financial sector head at Crisil, said his agency would revisit the ratings assigned to Indian banks. He did not rule out the possibility of downgrading a few. “The asset quality and earnings of the Indian banking sector are anticipated to come under stress in the future. The scenario ahead is not expected to be as good as it is today, as the credit growth of banks will witness a slowdown,” Bhatia said.

Karthik Srinivasan, co-head of financial sector ratings at Icra, said, “We are closely watching the ratings of 40 Indian banks. The ratings of a few of these banks are ‘weak’, according to our latest study. The overall profitability of the Indian banking sector is expected to take a hit this fiscal. Also, the asset quality of Indian banks is in deterioration mode. Although it’s too early to arrive at any conclusion, we might lower the ratings of a few banks.”

DR Dogra, deputy managing director, Care Ratings, said, “The scenario ahead for banks that we have rated may be very different in the days to come since their NPA levels are expected to rise quickly. We will revisit their ratings in the near future and downgrades could be a possibility “