On Friday, Moody's Investors Service downgraded various instruments of five public sector banks.
The long-term local and foreign currency deposit ratings of Bank of Baroda (BOB), Bank of India (BOI), Canara Bank and Union Bank of India (UBI) were downgraded to 'Ba1' from 'Baa3' and their baseline credit assessments (BCAs) to b1 from ba3. The outlook on the ratings of the four banks is negative.
Further, the rating agency affirmed Punjab National Bank's (PNB) long-term local and foreign currency deposit ratings at 'Ba1' and its BCA at 'b1'. PNB's rating outlook is changed to 'negative' from 'stable.'
It said the BCA downgrades take into consideration rising risks to the banks' asset quality as a result of the severe economic contraction, which will result in an increase in credit costs.
"This increase in credit costs will hurt profitability and also strain the banks' modest capitalization, reversing recent improvements. Funding and liquidity continue to be key credit strengths given their status as public sector banks, which results in good deposit franchises," Moody's said in its release.
Prolonged financial stress among households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of banks' balance sheets, said Moody's.
Further, it said these state-run lenders' Ba1 long-term local and foreign currency deposit ratings incorporate three-notches of uplift from their b1 BCAs to reflect Moody's assumption of a very high probability of support from the Indian Government in times of need.