[sbinews] Stable but not risk-free

  • From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Sat, 13 Dec 2003 08:01:57 +0500

Stable but not risk-free

International credit rating agency Moody’s has maintained a stable outlook for 
Indian public sector banks (PSBs) but is not satisfied with the quality of 
assets held by government banks. For most PSBs, the financial strength rating 
(FSR) given by Moody’s is grade D. Better run government banks like SBI get D+ 
whereas Bank of Baroda, Canara Bank and Punjab National Bank have got just D. 
Moody’s has said the overall rating does not get better than D because it is 
constrained by the relatively weak asset quality of these banks. The quality of 
profits can also be questioned as they are heavily dependant on treasury 
incomes which come from trading in government securities in a falling interest 
rate regime. This risk was also recognised by the RBI governor whose credit 
policy statement last month had delivered a strong message to the banks that 
they must move away from piling up government securities to do some quality 
lending. The banks’ excessive interest in long term government
 securities had pushed yields down to unsustainable lows of 5-5.75%. Any 
reversal in the interest rates could land the banks in a lot of trouble. 

However, Moody’s has focused more on the long term strengths and weaknesses of 
the PSBs. Overall, it believes that government banks have a modest “intrinsic 
financial strength”, potentially requiring some outside support at times. The 
evolution of the PSBs’ financial strength will depend on their modernisation 
efforts coupled with their ability to hedge their asset mix in such a manner as 
to minimise exposure to cyclical industries. Indeed, in recent years government 
banks have got trapped because of over-exposure to cyclical industries. This 
had been the main cause of the PSBs piling up massive NPAs in the nineties. In 
this context, Moody’s has also given some credit to the PSBs for diversifying 
their asset base by moving into the retail segment in a big way. The share of 
retail loans in the overall bank credit is still very small when compared with 
the international norms. However, sustained recovery in the cyclical industries 
such as steel, cement and textiles should go s
ome way in improving the intrinsic financial strength of the PSBs. 


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