Moody's downgrades IDBI Bank's baseline credit profile

While the pace of new impaired loan formation will slow during the year ending FY16 compared to the levels seen over the last three years, the rating agency expects the rate to remain high.

It said debt servicing metrics of the country's corporates remain weak.

The agency said a significant amount of corporate loans have already been recognised as impaired loans by the banking system.

However, the rating agency believes that there remains a material amount of loans associated with borrowers with weak financial metrics but which are not classified as impaired loans by the banking system.

"This situation is especially true for a few large and highly leveraged corporate groups.

Such exposures are the key sources of incremental asset quality risk for domestic banks, including IDBI," it said.

IDBI's buffers against further asset quality stress remain weak. Its core tier 1 of 7.29 percent at end March 2015 is low on an absolute level.

"The bank's capacity for internal capital generation will remain constrained by relatively low net interest margins (NIMs) and high credit costs," it said.

The bank did not receive any capital infusion from the government (Baa3, Positive) this year as it did not meet the government's profitability threshold.

The bank's ability to raise external core equity capital remains bleak as well and so capital remains a key credit weakness for it.

The agency said an upward change in the baseline credit assessment is possible if the bank substantially improves its profitability and tier 1 capital position on an internally generated basis or by accessing the capital markets rather than being dependent on equity infusion from the government.

"Significant improvement in asset quality accompanied with a large reduction in loan concentration risks would also lead to upward pressure on the BCA," it said.

The agency has confirmed IDBI Bank's deposit rating of Baa3, which benefits from four notches of uplift from its BCA of b1, owing to its assumption of a very high probability of government support, in spite of its weak standalone credit profile.