The Rating agency Standard and Poor’s (S&P) has announced its ratings for Indian Bank at “BBB-” on the expectation of ability to absorb a moderate deterioration in its asset quality across the next 12 months. The Chennai-based public sector lender is demanded to benefit from the faster-than-expected economic recovery in India.

The rating agency has removed the ratings from CreditWatch, where they were assigned with negative implications on June 26, 2020. Another public sector lender Allahabad Bank was merged with Indian Bank on April 01, 2020.

Outlook on a financial instrument is negative due to asset quality and capital risks. This could be reflected in the view that the bank's capital and asset quality could decline as a result of the Covid-19 fallout in the next 12-18 months.

Commenting on this, S&P states, “Non-performing loans (NPLs) in India's banking sector could rise to 10-11 percent by end-March 2022 (fiscal 2022), from about 8 percent as of June 30, 2020. We also forecast that an additional 3-8 percent of loans could get restructured.”

Chennai-based bank's risk-adjusted capital (RAC) ratio could fall below five percent on a sustained basis in the absence of external capital infusion, the rating agency said. Its capital adequacy ratio stood at 13.64 percent in September 2020.

The lender’s credit costs will stay high at 2.2-2.9 percent over fiscals 2021 and 2022, in line with our industry forecast. It reported that the NPL ratio declined to 9.9 percent of total loans as of Sept. 30, 2020, from 11.4 percent as of March 31, 2020. In the absence of the Supreme Court ruling barring banks from classifying any borrower as non-performing, Indian Bank's NPL ratio would have been higher by about 55 basis points but still lower than in previous quarters.
The improvement in asset quality was helped by a six-month moratorium on loan repayment that lasted until end-August, and the financial savings of borrowers.

Furthermore, S&P says, that the management expects about two to three percent of Indian Bank's loans to get restructured under the central bank's one-time restructuring window.