Moody's, the global rating agency, has downgraded the baseline credit assessments (BCA) for three public sector banks (PSBs) - Punjab National Bank, Bank of Baroda and Canara Bank - on the adverse economic environment.
It says the challenges have been aggravated by the depreciating rupee and high levels of inflation. The Reserve Bank of India's steps to support the rupee have not reversed its slide. As a consequence, interest rates might stay elevated for a longer period.
The rupee's value against the dollar has slid by 11.2 per cent, from 55.48 (May 22) to 61.71 (August 16), according to Bloomberg data.
Moody's cut its BCA rating for PNB by two notches, from ba3 to ba1. In the case of Bank of Baroda and Canara Bank, the cut was one notch, to ba1. It assigned a negative outlook to Union Bank of India's BCA, while affirming its ba2 rating.
Banks, especially public sector ones, will face difficulty in dealing with slower economic growth, deteriorating asset quality and declining margins, went a Moody's statement.
Meanwhile, global financial services firm Macquarie said recovery (of growth) in India was a mirage. Mere announcements or lip service from the government do not entail recovery. Cases being referred for corporate debt restructuring continue to remain very high. Also, most of the large assets restructured earlier aren't performing well (implying larger defaults from these) and the "big names" in the business, amounting to close to Rs 200,000 crore of debt (three per cent of system assets) are yet to be restructured; they'd come up over the course of the next few years.
The slippages are likely to entail more provisioning in banks' balance sheets, said Moody's. Stressed assets (unprovided) as a percentage of net worth is an alarming high of 100 per cent for state-owned banks, compared to six per cent for private banks, Macquarie added.
Moody's noted PSBs continued to report a deterioration in asset quality. Their impaired loans ratio (of gross non-performing loans plus restructured loans, as a percentage of gross loans) was above eight per cent at the end of March. The loan loss reserves' coverage for these impaired loans was under 25 per cent as of end-March.
Moody's said the capital ratios would remain under pressure. The situation was compounded by the relatively low capacity for internal capital generation. It noted the government had injected capital many a time in PSBs, due to their weak financial performance. It has a plan to invest Rs 14,000 crore ($2.3 billion) during 2013-14 in these banks, to raise their capital levels.
Though these capital injections have not taken place under extreme conditions, they do point to business models that are not self-sustaining from a financial perspective, said Moody's.
In June, the agency had placed Indian banks' ratings (on subordinated and junior subordinated debt) on review for a downgrade. It was done due to a change in methodology, to assess systemic support for bank subordinated debt.