Lower Govt Holding in PSBs Will Highlight Performance

Mumbai, Nov 5: | Updated: Nov 6 2003, 05:30am hrs
The Credit Rating Information Services of India Ltd (Crisil) has said that reduced government control will bring the standalone performance of public sector banks (PSBs) to the fore, triggering greater differentiation in their credit ratings.

According to Crisil, the current high ratings of PSBs, factor in a clear layer of support for benefits of government ownership, estimated to about one rating category. This is over and above the system support which all Indian banks enjoy.

It further said that disinvestment is likely to result in sharper distinction in PSB rating. On account of the dominating support factor linked to government ownership, Crisils ratings of PSBs currently fall in a narrow band.

If the government successfully distances itself from these banks, the moral obligation to support them would recede considerably.

In such a scenario, bank credit ratings would be largely determined on the strength of their standalone performance and risk profile, stated Crisil.

Despite several positives such as a wide branch network and stable deposit base, the standalone fundamentals of many PSBs may not be strong enough to support high safety category ratings. The key concerns relate to poor asset quality and relatively high cost of operations. A comparison of some key financial parameters across banking systems indicates that on aspects such as capitalisation and asset quality (solely measured by non-performing asset (NPA) level), Indian banks measure up closer to the bottom third of the heap.

Crisil opined that the protective aspect of system support would continue as in many countries across the world, even in the event of the Centre divesting its stake in PSBs.

This would continue to be a mitigating factor in Indian bank ratings. But many PSBs would be adversely affected till such time as they are able to leverage the positives of reduced government holding such as increased autonomy.

Crisil also stated that this is likely to impact their credit ratings and will lead to a sharper differentiation in its ratings of PSBs.