Credit rating agency ICRA has downgraded private sector lender Bandhan Bank’s long-term rating with outlook revised to stable. The rating agency has reaffirmed the lender’s short-term rating.

According to a stock exchange filing by the Kolkata-based lender on Tuesday, ICRA has downgraded ₹75 crore of non-convertible debentures to AA- from AA, and its outlook revised to Stable from Negative. The domestic rating agency reaffirmed A1+ for ₹3,000 crore certificates of deposit.

ICRA said the downgrade in the long-term ratings of Bandhan Bank reflected the “sustained weakness” in the emerging entrepreneur business (EEB) portfolio, which was likely to continue, given the concerns regarding borrower-level over-leveraging in the sector.

“ICRA notes that the bank’s gross stress pool {SMA1-1 & 2 in EEB portfolio and overall gross non-performing advances (GNPAs)} has declined, though at a slower-than-anticipated pace and driven by significant write-offs in FY2023 and FY2024, leading to high credit costs. Consequently, its profitability has remained subpar in relation to the pre-pandemic levels.”

The rating agency further said the bank’s capital cushions had also declined as a result of its “interpretation of RBI’s notification” leading to increase in the risk weights on certain exposures to 125 per cent, which was previously calculated at a risk weight of 75 per cent.

“In addition to affecting the capital cushions, this may pose challenges for growth or absorbing unexpected stress from the asset quality if internal capital generation remains weak,” ICRA said, adding, the bank’s profitability got impacted by the absence of income from sale of priority sector lending certificate (PSLC) and continuing balances in the low-yielding Rural Infrastructure Development Fund (RIDF) deposits, though the same would mature in the coming years.

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