According to industry sources, the state-run bank sent a note to this effect on Thursday immediately after the global rating agency issued a release from Melbourne saying it has revised the rating outlook of Industrial Development Bank of India (IDBI), ICICI Ltd and Bank of Baroda from stable to negative.

Neither Bank of Baroda chairman K Kannan nor executive director PS Shenoy was available for comment. This is perhaps the first instance of any Indian financial intermediary contesting the rating assigned to it by an international rating agency.

A few corporates and even financial intermediaries have in the past declined to accept ratings of domestic rating agencies. In fact, Bank of Baroda itself had sometime back refused to accept Crisil's rating when the premier Indian rating agency assigned double-A (AA) to its subordinated debt issue.

According torating agency sources, S&P has pointed out that the growth in Bank of Boardo's profitability is not very encouraging as the bank's net profit for fiscal 1998 included a huge writeback of depreciations made on the government securities' portfolio in the previous year. The bank had a depreciation benefit of Rs 259 crore of which it took Rs 169 crore in its profit and loss account.

The bank posted a net profit of Rs 458.73 crore after making provisions worth Rs 92 crore towards leave encashment, one-time settlement of public issue expenses, etc. In effect, the bank had taken into account Rs 77 crore worth of depreciation benefit to shore up its net profit. "Even if one takes that out, BoB posted a handsome rise in net profit in 1998 over the previous year's net of Rs 276.53 crore," banking analysts said.

S&P has, in its review, also pointed out Bank of Baroda's lack of expertise in managing interest rate risks. With the high percentage of time deposits, the bank's spread is likely to be squeezed, the ratingagency has observed.

Bank of Boarda is believed to have contested the perception of the rating agency. It strongly feels that it has suffered no setback due to the economic slowdown which is a major concern of S&P, rating industry sources said.

S&P had, on October 22, lowered the foreign currency credit ratings of domestic banks and financial institutions and corporates by a notch to BB from BB+ and changed the outlook from negative to stable, in line with its downgrade of the sovereign rating the same day.

"The outlook change (from stable to negative) reflects Standard and Poor's concerns that continued weakness in a number of key sectors of the Indian economy will have an adverse effect on the asset quality and profitability of India's financial intermediaries," an S&P statement on Thursday said.

"Asset quality within the Indian system continues to deteriorate, although balance-sheet growth has disguised non-performing assets, which have increased in absolute terms," it said.