India Ratings and Research (Ind-Ra) has revised its outlook on public sector banks to 'negative' from 'stable' for October-March period of the current financial year 2020-21. The outlook was downgraded in view of expected rise in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects in the wake of the measures taken to contain the spread of COVID-19.

Given that capital buffers for most public sector banks (PSBs) remained modest, the spike in stressed assets due to pandemic is expected to double the credit costs for banking system than estimated pre-COVID-19 levels for FY21, the agency said.

"The agency has revised the rating outlook on PSBs to negative for H2 FY21 from stable. The state-owned banks modest capital buffers are expected to deplete further in FY21, due to provisioning requirements. Also, pre-COVID profitability expectations for FY21 would be belied and most banks are likely to report net losses," Ind-Ra said.

As per Ind-Ra, public sector banks will need to continue to build-up their provision cover in FY22 for restructured assets as some of the restructured assets could turn bad loans in FY23. They would require Rs 35,000 crore -Rs 55,000 crore in H2 FY21 for Tier 1 ratio of 10 per cent. The provisions are much lower in case of private banks.

Meanwhile, Ind-Ra has maintained a 'stable' outlook for private banks, as they are better placed to withstand the challenges presented by the coronavirus pandemic. Most large banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio.

"While the system's credit growth could remain anaemic, and short-term financial performance could deteriorate modestly, large banks may benefit from credit migration. As opportunities arise, these banks are in a position to gain substantial franchise growth in the medium term, given that they have also added to their capital buffers over the past few months," it said.