Global ratings agency Fitch today said ICICI Bank and Axis Bank have "gaps" in their risk control mechanisms and has revised down its outlook on the latter to negative on sour assets worries.
"Both the banks exhibit gaps in risk controls. An ongoing investigation at ICICI Bank on extending a loan with a potential conflict of interest has also focused authorities' attention on the bank's governance," it said in a note.
The report also warns that adverse findings may create a "reputational risk", especially if they point at broader weaknesses in management.
The agency cut its outlook on Axis Bank's issuer default rating to negative from stable, pointing out to the high proportion of NPAs and the limited capital buffers available, despite a recent infusion.
It can be noted that a spike in NPAs and provisioning for the same have led the bank, which is searching for a new head after the board agreed to cut short Shikha Sharma's tenure, to report its first ever quarterly loss in Q4 of FY18.
Commenting on ICICI Bank, the report said, "capital buffers are better even though it has experienced similar financial deterioration like Axis Bank in the previous few financial years."
The agency also downgraded ICICI Bank's 'support rating' to '3', from '2', apart from revising down its support rating floor to 'BB+', from 'BBB-'.
But the agnecy has affirmed the issuer default ratings and viability ratings of ICICI Bank and Axis Bank at 'BBB-' and 'bbb-', respectively.
It can be noted that both the private sector lenders have had a tumultuous time in the past few months. While ICICI Bank managing director and chief executive Chanda Kochhar is facing allegations of conflict of interest and lack of disclosures, it has been NPAs and the ensuing management change that is dogging Axis Bank.
Media reports initially said the RBI was unhappy to extend Sharma's tenure by three years, after which she requested to cut the tenure, which was accepted by the board.
Fitch, which has a negative outlook on domestic banks, said the new regulatory NPAs that has accelerated bad-loan recognition will help improve the health of the banking sector over the long-term.
The report has further said the present NPA ratios make it believe that there has been a full recognition of the legacy problems and the ongoing bankruptcy resolutions can also help positively.
"We expect the internal capital generation for the sector, including the two private sector banks, to stay weak in FY19," it added.
The larger private sector lenders have robust deposit franchises but enjoy less depositor confidence than state- owned banks due to the latter's government ownership, but this could lead to greater changes in funding costs and liquidity in "an extreme scenario", the report warns.