Moody’s Investors Service on Monday downgraded long-term bank deposit ratings of two public sector banks and said that the introduction of policies like the Financial Resolution and Deposit Insurance Bill suggests that the extent of the government’s support to some banks is likely lower than was previously assumed. “A stated intention of the resolution framework is to limit the use of public money to bail out distressed entities. As a result, banks benefiting from the very highest levels of support are likely to see less support over time,” it said.
Moody’s downgraded the long-term local and foreign currency bank deposit ratings of Indian Overseas Bank (IOB) and Central Bank of India (CBI) to Ba3 from Ba1. The Indradhanush recapitalisation plan, Moody’s said, will only provide Rs 20,000 crore of additional capital in the two fiscals to March 2019, short of the amount still required for banks to address solvency challenges and recapitalise themselves.
“The government has not increased its planned capital injections, although most public sector banks have not been able to raise the required capital from the equity capital markets,” it added.
Moody’s explained that it continues to position the rated public sector banks in the “very high” support bucket, reflecting the systemic importance of public sector banks in India. “The government owns a majority stake in these banks and is visibly involved in their management, including appointment of senior managers and setting of key performance indicators,” it said, adding that the viability of public sector banks is crucial for maintaining overall systemic stability, given that these banks cumulatively account for around 74% of the banking system assets.
Moody’s expects asset quality to remain the key credit weakness for the rated PSBs. It added that net non-performing loan formation rates, while moderating compared to the levels seen in the last two years, will remain elevated on an absolute basis. “We expect the government to remain the key source of external capital for these banks,” it said.