Privatisation of two public sector banks can impact their ratings as the government support to the two entities will disappear, India Ratings and Research said on Wednesday.

The rating agency said the Budget proposal to privatise the as yet unidentified PSBs “could lead to material negative migration of the long-term issuer ratings (mapped to senior instruments such as infrastructure bonds) and the ratings on Tier 2 instruments of the identified banks”.

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The impact will be more if the government chooses to privatise the weaker banks, which are yet to be consolidated, it added.

Factoring in timely intervention from the government and minimal probability of default, the agency said it has a rating floor of ‘IND AA-’ for senior instruments and Tier 2 instruments of banks, which are majority-owned by the government.

The agency explained that it establishes a long-term issuer rating and equates the rating on senior issuances like infrastructure bonds and Tier-2 sub-debt to it.

The long-term issuer rating is arrived at a higher support-driven rating, factoring in the extraordinary distress support and the standalone credit profile of the issuer, which may factor in the ordinary ongoing support, it added.

In the case of hybrid instruments like additional tier-1 bonds, the rating is based on the standalone profile that factors in ordinary support from the government for PSBs as the terms of these instruments could, under certain circumstances, prevent the support for servicing these instruments, it said.

Ind-Ra’s rating of AT1 instruments for weaker government banks could be multiple notches below the long-term issuer rating, factoring in the inherent weakness of the institutions along with the discretionary nature of the security, which could impact its ability to service the instrument, the agency said.

The government has ceded majority in only one bank – when it sold 51 per cent in IDBI Bank Limited to Life Insurance Corporation of India, it noted.

“Once the banks to be privatised are identified, the agency as per its criteria may place the ratings on a rating watch. Based on clarity on the final contours of the transaction, the rating agency would take appropriate rating calls,” it said.