'Worsening asset quality to affect PSBs' credit profiles'

Worsening asset quality will affect the credit profiles of public sector lenders, which may require higher capital infusion from the government, rating agency Crisil said.

"Intensifying asset quality problems at PSBs have the potential to impair their credit risk profiles and necessitate significantly higher capitalisation of PSBs either through government infusion or relaxation of regulatory capital norms," it said in a report.

Public sector banks (PSBs) account for as much as 85 per cent of the banking sector's weak assets, reported PTI.

Increasing stress is also visible in the quantum of strategic debt restructuring and 5/25 structuring being carried out by banks.

Most of the PSBs that have declared their third quarter results reported either dip in profits or net losses, including Punjab National Bank, Dena Bank, Indian Overseas Bank and Central Bank of India, among others, reported PTI.

Over the past 18 months, Crisil has either downgraded or revised its outlook to 'Negative' for nine out of the 25 PSBs that it rates on the back of expectations of worsening asset quality.

In May last year, the rating agency had estimated weak assets in banks to rise to a high of around Rs 5.3 lakh crore or 6.3 per cent of total advances by March 2016.

"However, the deterioration in asset quality in the first nine months of the current fiscal has been faster than expected for various reasons, such as the severe downturn in global commodity prices, inability of the leveraged players to sell assets, and the proactive identification of stressed assets as part of RBI's asset quality review," the report said.

The provisioning requirement of PSBs will increase further and render their pre-provisioning profits inadequate, leading to a significant deterioration in earnings profiles, it said.

The government will have to step in and provide more capital than what was committed under the 'Indradhanush' plan.

"We will be looking out for government announcements for such measures, including in the upcoming Union Budget," it added.

"If that doesn't happen, our threshold of 'high safety category' for PSBs could get lowered," Crisil said.

Under the PSB revamp plan Indradhanush, the government has earmarked Rs 70,000 crore capital infusion in PSU banks over a period of four years.

Of this, Rs 25,000 crore will be infused in FY16 and FY17 each and Rs 10,000 crore in both FY18 and FY19.