Moody’s Investors Service has downgraded debt issued by IDBI Bank over concerns on “reduction in the amount of extraordinary government support incorporated into the bank’s ratings and its weak standalone credit profile,” the bank said.
While earlier, Moody’s used to assume that government support for IDBI Bank was at the top-end of the ‘very high’ band, now it assumes that government support is towards the mid-point of the ‘very high’ band.
This is despite the fact that IDBI Bank has received Rs 18.6 billion (Rs 1860 cr) of new equity from the government since May 2017, when Moody’s initiated its review of the Bank’s debt rating. The bank also received 3.9 billion rupees of new equity from the Life Insurance Corporation of India (LIC) during that time.
Despite these capital infusions, said Moody’s, IDBI remains significantly undercapitalized, with a common equity tier 1 ratio of only 6.5%, “which is below the current minimum CET 1 ratio norms after factoring in the requirements of capital conservation buffers.”
“At the same time, Moody’s continues to position government support for IDBI in the “very high” bucket, reflecting the systemic importance of public sector banks in India.
“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,” the agency said.
IDBI Bank, which is heavily exposed to corporate clients, is among the worst hit in India by the ongoing wave of defaults and delays by big corporations in India in paying back or servicing their loans.
Over the next 12-18 months, Moody’s expects asset quality issues to persist, although the pace of non performing loan (NPL) formation should significantly slow, it said.
“Given its weak asset quality, credit costs will remain high over the next 12-18 months.
“Despite its weak solvency profile, Moody’s notes that IDBI’s funding and liquidity positions have remained fairly stable.
“Nevertheless, given the dominance of corporate deposits, Moody’s expects the risks to the Bank’s funding and liquidity position have increased because of its weak solvency profile. This situation is especially so in regard to the Bank’s foreign currency book,” it said.
It also said that a significant improvement in IDBI’s capital levels or asset quality will lead to an improvement in its ratings.
Ratings are crucial as they determine the interest rate paid by a company to take loans from the market.