Credit rating agency Crisil has revised upwards ratings of eight public sector banks (PSBs) and the rating outlooks of three other banks. These rating are based on Crisil?s reassessment of the support the PSBs are likely to receive from their majority shareholder, the government, in the wake of the latter?s recent steps and pronouncements.
The rating agency has assigned highest long-term ratings to Bank of India and Union Bank of India, upgraded ratings of Allahabad Bank, Bank of Maharashtra and UCO Bank, revised upwards the outlook of Canara Bank, Corporation Bank, Central bank of India , IDBI Bank, Punjab & Sind Bank and Dena Bank as stable.
Following the reassessment, ratings on the lower tier-II bonds of PSBs, which earlier spanned the range from ?AAA? to ?AA-?, now lie between ?AAA? and ?AA?. The ratings on the banks? hybrid instruments too have been appropriately revised.
In the Union Budget 2009-10, released earlier this month, the finance minister stated the government?s intention to retain majority ownership (shareholding of 51% or more) in all the PSBs. The government was earlier evaluating the option of reducing its minimum shareholding to 33% while retaining management control. The government has, additionally, reiterated that it will take appropriate measures to maintain capitalisation in PSBs at around 12%, so that these banks can grow and remain competitive.
In FY09, the government had infused Rs 16.5 billion of capital into three PSBs; it is committed to infusing Rs 21.5 billion more by the end of September.
Raman Uberoi, senior director, Crisil Ratings, said: ?These measures represent a stronger and more specific articulation of government?s intention than in the past. This articulation is a key factor in Crisil?s reassessment of the expected support.? This enhanced expectation of support from the government is also consistent with actions that governments across the globe have taken to shore up their banking systems.
Since the eruption of the global financial crisis, sovereigns have demonstrated their willingness to support banks and financial institutions, by providing both capital and liquidity. Given the systemic importance of banks, and their role in revitalising economies, an increasing number of governments have supported even banks that are not government-owned.
In its ratings on PSBs, Crisil has always factored in an expectation of strong government support. This is because the government is both the owner of the PSBs and the guardian of the financial system. The stability of the banking sector is of prime importance to the government, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs and the severe political repercussions of a bank failure.
Crisil believes that Indian banks are adequately capitalised. Despite an expectation of deterioration in the asset quality of the banking sector in 2009-10 and 2010-11, the capital profile of these banks is robust enough to withstand the challenge.
According to Pawan Agrawal, director, Crisil Ratings, ?Since Indian banks are already well-capitalised, we believe that this enhanced commitment from the government towards ownership and capital support signals that it will do everything possible to further strengthen the PSBs.?