The credit rating agency Fitch Ratings has downgraded the Viability Ratings (VR) of State Bank of India (SBI) and Bank of Baroda (BoB) by one notch each reports say. The VR of SBI has been downgraded to BB+ and that of BoB has been brought down to BB. As mentioned in the same report, VR measure the 'intrinsic creditworthiness of a financial institution'.
The downgrade is being seen as a consequence of the poor asset quality and earnings on capital position of each of the two public sector banks.
This report in the Mint quotes Fitch Ratings as saying that, "“Fitch has downgraded the Viability Rating (VR) of SBI and BoB by one-notch to ‘BB+’ and ‘BB’, respectively, reflecting their weakened intrinsic risk profile due to the negative effect of persistently poor asset quality and earnings on their capital position. The banks’ core capital buffers also appear more vulnerable to moderate shocks".
Non-performing assets, or simply put, bad loans, have reached crisis-levels in Indian public sector banks. Multiple initiatives of the Union government, including Indradhanush and bank recapitalisation have been targeted towards the NPA problem. Out of these, the one which shows potential for a clean up is the Insolvency and Bankruptcy Code (IBC) enacted in mid-2017. The time-bound insolvency process which the IBC imposes has started to deliver initial results and is likely to contribute to an NPA clean up in cases where the creditors of firms undergoing insolvency proceedings are public sector banks.
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