The eight downgraded banks are Andhra Bank , Bank of Baroda , Bank of India , Canara Bank , Central Bank of India , Corporation Bank , Dena Bank and IDBI Bank .
“These actions are driven by the expectation that the asset quality problems being faced by PSBs will remain acute and continue through most of the next fiscal. The resultant impact on profitability and capitalisation can further dent the credit profiles over the medium term,” Crisil said in a press release.
The ratings agency expects weak assets to rise to Rs 7.1 lakh crore by March 2017 from Rs 4 lakh crore on March 2015. It also said, weak assets will rise to 11.3 percent of total loan book by March 2017 from 7.2 percent in March 2015.
Crisil also believes slippages to NPAs is likely to remain high driven by stretched cash flows of highly-leveraged corporates.
It added that the earnings profile of most PSBs has deteriorated with many expected to report a full-year net loss this fiscal. “With the banking system having to migrate to the marginal cost of funds-based lending rate, or MCLR, regime from April 1, 2016, and the proportion of zero income-generating bad assets in the loan book of PSBs rising, net interest margin will come under fresh pressure in the near-term. This, coupled with loan loss provisioning at a number of PSBs surpassing pre-provisioning profit, due to increased slippages and a rising inventory of ageing NPAs, could result in many PSBs reporting a loss even for the next fiscal,” Crisil further explained.
Lastly, the ratings agency also said that despite relaxation of capital regulations by the Reserve Bank, government support will not be enough and capital raising through non-government route will be a challenge for PSBs due to weak financial performance and low valuations.