Moody's downgrades IOB, Central Bank's deposits

Ratings agency, Moody's, has downgraded ratings for Central Bank of India and Indian Overseas Bank's (IOB) local and foreign currency deposits from "Baa3" to "Ba1" following government's policy to differentiate between public sectors banks (PSBs) when distributing capital.

The government has indicated that efficient banks will receive capital from its majority owner (Government of India). PSBshave to reorient policies to rejig businesses and compete forequity capital.

At the same time, IOB's senior unsecured debt, issued from its Hong Kong branch was also downgraded to Ba1 from Baa3, Moody's said in a statement.

The rating action reflects Moody's assumption of a lower level of support from the Government of India following its recent decision indicating policy to differentiate between state-owned banks (SOE banks) when distributing capital.

It continues to assume a very high probability that the government would support these two state-owned banks.

Change in rating stance

Now, the standalone credit quality of PSBs has become a more important consideration for the senior unsecured and deposit ratings of the banks compared to previously when Moody's rated all SOE banks at the same level as the Government of India.

At the same time, Moody's has maintained its negative outlook on Central Bank's local and foreign currency deposit ratings. Moody's has also maintained its stable outlook for IOB's senior unsecured debt and local and foreign currency deposit ratings.

CBI and IOB have the weakest standalone credit profiles among Moody's rated Indian banks, as indicated by their baseline credit assessments (BCA) of b3 and b2 respectively.

Moody's said the new policy for capital allocation to PSBs represents a marked departure in its approach to allocating capital until now.

Under the new criteria, the government will give preference in allocating capital to banks whose average return on assets over the past three years and whose return on equity over the past one year surpass the corresponding weighted average ratios of SOE banks.

In contrast, over the last four years, banks with weaker capital levels received higher capital allocations, regardless of their size or profitability. Moody's notes that this new approach has been reflected in the capital allocations earmarked for the fiscal years ending March 2015 and March 2016.

For FY 2015, the government only allocated Rs 6,990 crore from its initial budget projection of Rs 11,200 crore. Only nine banks -- which had satisfied the profitability criteria -- actually received capital.

For FY 2016, the government has only allocated Rs 7,940 crore for capital infusions even though the capital requirements of the SOE banks remain at high levels.