Public sector banks, including State Bank of India (SBI), the largest one, saw downgrades from Moody's and Fitch Ratings, two international ratings agencies, on Monday.
Moody's downgraded SBI's senior unsecured debt and local currency deposit ratings from Baa2 to Baa3 with stable outlook.
The lender's financial strength rating was affirmed at D+ while the outlook was revised downwards from stable to negative.
According to Moody's, worsening asset quality and the need for capital infusion by a cash-strapped government were the key factors behind the downgrade. "The bank will have to compete with other public sector banks that have similar recapitalisation needs," said Moody's in the statement.
Weak economic conditions will negatively impact the asset quality, profitability and capital of public sector banks, including SBI, Moody's said. "Consistently high loan growth, together with rising problem assets, lower margins, and additional provisioning requirements, imply that SBI's capitalisation levels will decline without external capital injections."
The ratings agency said that an upgrade is unlikely in the case of SBI because of the challenging macroeconomic outlook.
Fitch downgraded the viability ratings of Punjab National Bank, Bank of Baroda and Indian Bank from 'bbb-' to 'bb+' on the review of the banking sector amid economic slowdown.
Fitch also downgraded Indian Bank's long-term issuer default rating from 'BBB-' to 'BB+' due to deteriorating asset quality.
"The economic slowdown is likely to be more protracted than Fitch initially expected because of the currency volatility in recent months and persistent high inflation," said the ratings agency.
Fitch expects that asset quality at Indian banks, particularly state-owned banks, would worsen, resulting in a larger amount of stressed assets than initially estimated and the amount would peak only in financial year 2014-15, not this fiscal.
Downgrades galore
SBI's senior unsecured debt and local currency deposit ratings of Moody's - down from Baa2 to Baa3
SBI's financial strength - Moody's affirms D+ rating - outlook revised downwards from stable to negative
Fitch's viability ratings of Punjab National Bank, Bank of Baroda and Indian Bank - downgraded from 'bbb-' to 'bb+'
Fitch's long-term issuer default rating on Indian Bank - downgraded from 'BBB-' to 'BB+'
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