Higher level of stress is likely to significantly impact earnings and solvency profile of public sector banks over next 2-3 years, says an ICRA report.
"Credit profile of PSBs has worsened because of higher than anticipated stress, slower than expected pace of recovery and weak outlook for several credit intensive sectors," it said.
"Additionally, adverse capital markets conditions have reduced the prospects of mobilizing capital from non government sources, while there has been no material success in mobilizing capital through Additional Tier I (AT1) instruments," it added.
All these factors contribute to deterioration in credit profile of the PSBs, which may get reflected in ratings or outlook change announcements for some of the PSBs over next few days once the rating reviews are concluded, it said.
ICRA ratings for PSBs continue to assume high level of support from Government of India (GoI), later being majority shareholder in PSBs.
Continuation of timely support from GOI would continue to remain a key driver for the ratings, it said.
In light of the challenges highlighted above and higher exposure of PSBs to stressed sectors, their asset quality indicators are likely to remain weak over next 1-2 years.
"As it would be a challenge to reduce the pace of fresh NPA generation as well as recover from a large stock of Gross NPAs and standard restructured advances, estimated at around 13.3 per cent as on December 31, 2015," it said.