Rating agency Fitch has downgraded its ratings on bonds issued by the public sector UCO Bank, and the private sector IndusInd Bank, laying bare its lack of confidence in Indian banks amidst concerns over the two bank's financial positions. 

Earlier this week, Fitch also warned that ICICI Bank was up for a potential downgrade if its assets deteriorated and liquidity pressures increased in its overseas business. About a week ago, Fitch had warned of downward revisions of UCO Bank, IndusInd Bank, and Dena Bank.

Reports in the media said that while a possible downgrade of Dena Bank was possible in the coming few days, Fitch already has revised its outlook on UCO Bank and IndusInd to 'negative'. 

Fitch has affirmed IndusInd's lowered tier-II bonds and national short-term ratings, but has downgraded its upper tier-II bonds by two pegs. The ratings agency pruned UCO Bank's subordinated debt and national long-term ratings from 'AA' to 'AA-', ratings on upper tier-II bonds and perpetual tier-I bonds is cut to 'A' from 'AA-'. 

Fitch cited Uco Bank's increased vulnerability on account of the adverse credit conditions, especially on account of its weak net worth, profitability and loan loss reserves were the main reasons as reasons for the downgrade. It said that these benchmarks for UCO Bank are below the system median for Indian banks.

"UCO's national and individual ratings downgrade reflect the bank's increased vulnerability, given the present adverse credit conditions; particularly in view of its weak core capital, profitability and loan loss reserves that are well above the system median for Indian banks," Fitch said in a statement. 

Fitch also said that though the level of bad loans has improved, UCO Bank's performance still trails that of its rated government bank peers. The negative outlook is on account of concerns about the bank's core capital levels, particularly as asset quality of Indian banks may come under pressure during the next two years. 

In the case of IndusInd, Fitch said the bank's national long-term and individual ratings have been affirmed to reflect initiatives taken by its new management to mitigate the structural mismatch in its asset-liability profile. IndusInd has a high ratio of fixed-rate vehicle finance loans that are mostly financed by rate-sensitive 'wholesale' deposits. In turn, this led finances to deteriorate significantly between fiscal years 2006 and 2008. IndusInd is now starting to diversifying its loan portfolio, limiting the chunk of its fixed-rate loans and growing its retail liability franchise to rectify the mismatch.