CRISIL has revised upwards its ratings on eight public sector banks (PSBs), and its rating outlooks on three more. These rating actions are based on CRISIL’s reassessment of the support the PSBs are likely to receive from their majority shareholder, the Government of India (GoI), in the wake of GoI’s recent steps and pronouncements. Following the reassessment, ratings on the Lower tier-II bonds of PSBs, which earlier spanned the range from ‘AAA’ to ‘AA-’, now lie between ‘AAA’ and ‘AA’. The ratings on the banks’ hybrid instruments too have been appropriately revised.

In the Union Budget 2009, released earlier this month, GoI has stated its intent to retain majority ownership (shareholding of 51 per cent or more) in all the PSBs; GoI was earlier evaluating the option of reducing its minimum shareholding to 33 per cent while retaining management control. The government has, additionally, reiterated that it will take appropriate measures to maintain capitalisation in PSBs at around 12 per cent (overall capital adequacy ratio), so that these banks can grow and remain competitive. In 2008-09 (refers to financial year, April 1 to March 31), GoI infused Rs.16.5 billion of capital into three PSBs; it is committed to infusing Rs.21.5 billion more by the end of September. Says Raman Uberoi, Senior Director, CRISIL Ratings, “These measures represent a stronger and more specific articulation of GoI’s intent than in the past. This articulation is a key factor in CRISIL’s reassessment of the expected support.”

This enhanced expectation of support from GoI to PSBs is also consistent with actions that governments across the globe have taken to shore up their banking systems. Since the eruption of the global financial crisis, sovereigns have demonstrated their willingness to support banks and financial institutions, by providing both capital and liquidity. Given the systemic importance of banks, and their role in revitalising economies, an increasing number of governments have supported even banks that are not government-owned.

In its ratings on PSBs, CRISIL has always factored in an expectation of strong GoI support. This is because GoI is both the owner of the PSBs and the guardian of the financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs, and the severe political repercussions of a bank failure. Between 1985 and 2008, GoI, along with the Reserve Bank of India (RBI), recapitalised the banking system by infusing capital of Rs.221 billion into PSBs. “We now see evidence of an enhanced degree of GoI support to the banks, following the pronouncements in the budget”, added Mr. Uberoi.

CRISIL believes that Indian banks are adequately capitalised. Despite an expectation of deterioration in the asset quality of the banking sector in 2009-10 and 2010-11, the capital profile of these banks is robust enough to withstand the challenge (see CRISIL’s April 2009 report, ’Asset quality of Indian banks’).

Mr Pawan Agrawal, Director, CRISIL Ratings, adds: “Since Indian banks are already well-capitalised, we believe that this enhanced commitment from the government towards ownership and capital support signals that it will do everything possible to further strengthen the PSBs. Given these developments, we have reassessed our rating approach to PSBs. Of course, the standalone credit profiles of PSBs continue to be important drivers of the ratings.”

The banks for which ratings and outlook have been revised are listed below:

Name of bank	Existing Rating	Revised Ratings
Allahabad Bank Lower Tier-II Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AA/Stable AA/Stable	AA+/Stable AA+/Stable
Bank of India Lower Tier-II Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AA+/Stable AA+/Stable	AAA/Stable AAA/Stable
Bank of Maharashtra Lower Tier-II Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AA/Stable AA/Negative	AA+/Stable AA/Stable
Canara Bank Lower Tier-II Bonds/Infrastructure Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AAA/Negative AAA/Negative	AAA/Stable AAA/Stable
Central Bank of India Lower Tier-II Bonds Hybrid Instruments (Upper Tier-II Bonds)	AA/Stable AA-/Negative	AA+/Stable AA/Stable
Corporation Bank Lower Tier-II Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AAA/Negative AAA/Negative	AAA/Stable AAA/Stable
Dena Bank Lower Tier-II Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AA-/Stable A/Stable	AA/Stable A+/Positive
IDBI Bank Ltd Lower Tier-II Bonds/Omni Bonds/Flexi Bonds/Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AA+/Negative AA/Negative	AA+/Stable AA/Stable
Punjab & Sind Bank Lower Tier-II Bonds	AA-/Positive	AA/Stable
UCO Bank Lower Tier-II Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AA/Stable AA-/Negative	AA+/Stable AA/Stable
Union Bank of India Lower Tier-II Bonds Hybrid Instruments (Upper Tier-II Bonds /Tier-I Bonds)	AA+/Stable AA+/Stable	AAA/Stable AAA/Stable