“The downgrade reflects the moratorium imposed on the bank by the central government, by which payments from the bank to its depositors and creditors are now limited,” said Icra.
The Reserve Bank of India (RBI), in consultation with the central government, also replaced the bank’s board of directors due to the deteriorating financial condition of the bank.
The bank had not paid the Basel II Tier I bond coupon due March 5, provided that the bank complies with the regulatory capital ratio (CAR). Payment of the coupon on these bonds also required prior approval from RBI in the event that payment of the coupon resulted in an increase in the net loss.
The bank in its latest results for H1FY20 had reported an RAC of 16.30% and a loss of Rs 486 crore, however, it reported its Q3FY20 results.
According to Icra, the payments restricted during the moratorium period considerably limit the bank’s ability to honor its commitments in a timely manner. The terms of the bank’s reconstitution or merger proposal will remain the main determinants of future rating actions for the above instruments.
“The deterioration in the credit profile of its large borrowers has led to a sharp increase in its level of stressed assets compared to its basic capital. In addition, the limited resolution of these stressed assets so far and the bank’s inability to raise sufficient capital in a timely manner have further weakened its financial profile, “said the rating agency.