The agency downgraded to Ba1 from Baa3 its ratings on local and foreign-currency deposits of Central Bank of India and Indian Overseas Bank. IOB's senior unsecured debt was also downgraded to Ba1 from Baa3.
Moody's action reflect its assumption of a lower level of support from the Government, which is rated Baa3/BBB-/BBB-.
State supports typically gives a lift of anywhere between 2 and 6 notches to a standalone rating of a lender, according to analysts.
Even after today's downgrades, CBI and IOB final ratings have government support of five and four notches above their standalone ratings, respectively. Central Bank of India and IOB have standalone ratings of B3 and B2, respectively, from Moody's.
On February 7, the Government announced that it would inject Rs 6,990 crore in capital into nine state-owned banks, the first portion of the Rs 11,200 crore capital infusion earmarked for the current fiscal year to March 31 2015.
Most importantly, the Government changed the criteria for this capital injection, using banks' profitability as a key parameter.
Under the new criteria, the preference for capital infusion will be given only to banks with average returns on assets over the past three years and returns on equity over the past one year that surpass the corresponding weighted average ratios of state-owned banks overall.
Earlier, state owned Indian banks with weaker capital levels received higher capital allocations, regardless of their size or profitability.
The change in criteria was negative for less-profitable Indian banks, such as Central Bank of India, IOB and IDBI Bank, Moody's said in mid-February.
Moody's also said last month that Punjab National, Bank of Baroda, State Bank of India and Syndicate Bank would benefit because they were among the more profitable state-owned lenders.
The agency said today it continued to assume a very high probability that the Government would support Central Bank of India and IOB.
"However, the change of government policy means that the standalone credit quality of public sector banks 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," Moody's said.
The agency noted that this new approach had been reflected in the capital allocations earmarked for the fiscal years ending March 2015 and March 2016.
For 2015-16, the government has only allocated Rs 7,940 crore for capital infusions even as the requirement remains high.
Source : Thehindubusinessline