Credit rating agencies have turned bearish on public sector banks. After Crisil’s concern on asset quality of banks, Moody’s Investor Service expects credit profiles of public-sector banks to take longer time to improve given their high level of impaired loans and weak capital positions.

Slow recovery “Improvement in banks asset quality was marginal last fiscal, and much weaker than we had expected,” said Srikanth Vadlamani, Vice-President and Senior Credit Officer, Moody's.

A longer time-frame is needed for the credit profiles of public-sector banks to improve, because their asset quality is tied to the slow, multi-year recovery of corporate balance sheets, and the lagging recognition of associated credit costs,” he said at a conference held by Moody’s and ICRA on Wednesday. Public-sector banks represent more than 70 per cent of the total banking system assets in India.

Mounting pressure Vadlamani said public-sector banks need significant capital requirements over the next few years, and their internal capital generation capacity is also weak, while access to equity markets has been difficult.

Given the low capital levels of public-sector banks as a whole, the Government’s selective approach to infuse capital would further put pressure on the credit profiles of weaker banks.

Crisil Ratings also expressed similar concerns on public sector banks in its report released on Tuesday. The report estimated the gross non-performing assets of Indian banks to rise by ₹60,000 crore to ₹4 lakh crore (4.5 per cent of total loans) and total weak assets to be at 6 per cent of total loans (similar to FY15) to ₹5.3 lakh crore in FY16, as against ₹4.7 lakh crore in FY15.

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