India Ratings & Research (Ind-Ra) has affirmed Lakshmi Vilas Bank's (LVB) long-term issuer rating at 'BBB+' at a negative outlook.

The agency has also affirmed LVB's short-term issuer rating at 'A2+' and Rs 1.3 billion lower tier 2 debt at 'BBB+'.

The ratings and negative outlook reflect LVB's continued weakening of capital buffer, especially in view high net NPLs/equity. Ind-Ra understands the bank plans to raise equity in coming months and believes fresh capital infusions will have to be significant enough to enhance capital buffers to a comfortable level.

The bank's asset quality is weak and its mediocre profitability buffers can come under further stress as credit costs are likely to remain elevated.  

LVB needs to strengthen its capitalisation ratios, which have come under pressure as the loan growth, though average, has sharply outpaced its weak internal accruals. The bank's Tier 1 ratio declined to 8.1% in 1HFY14 from 9.1% in FY13 with a commensurate decline in tangible equity/assets to 5.6% from 5.8%.

The concern is aggravated on account of its modest borrowers' profile and meagre provision coverage on elevated gross NPLs, resulting in a high net NPLs/equity ratio.