The large-scale fraud perpetrated on Punjab National Bank has hit its rating. Fitch Ratings has placed its Viability Rating of 'bb' on Rating Watch Negative (RWN). The rating firm said it will resolve the Rating Watch “once more clarity emerges on the extent of control failures and the impact on PNB's financial position”.

“At this stage, Fitch does not view this event to have an impact on PNB's Support Rating Floor (BBB-) due to the bank's high systemic importance as the second-largest state-owned bank. We believe that the state's propensity to provide extraordinary support to PNB remains high, subject to the sovereign's ability, which is captured in India's sovereign rating of 'BBB-',” it said in a release.

The RWN reflects the possibility of a downgrade of PNB's Viability Rating following the detection of a large fraud in one of the bank's branches amounting to $1.8 billion. While the exact financial impact from this event is still being ascertained, it has raised questions on both internal and external risk controls as well as the quality of management supervision considering that the fraud went undetected for several years.

PNB's asset quality and capital parameters continue to be weak but have shown some stability since Fitch's rating action in June 2017. For the nine months of financial year to December 2018 PNB's non-performing loan (NPL) ratio eased to 12.1% (12.5% FYE17) while its CET1 ratio improved to 8.05% (7.9%). Profitability continued to be weak but the bank raised Rs 50 billion ($770 million) in fresh equity from the capital markets in 3QFY18. PNB is also likely to get an additional Rs 54 billion ($850 million) from the government by end-March 2018 under the government's recapitalisation agenda.