|Shooting the messenger|
|Saturday, 22 October 2011 00:00|
Finmin attack on rating firms misplaced
Given the role of credit-rating agencies in bringing the world to its knees in 2008, it is understandable that the finance ministry should be upset with two recent reports/actions—Moody’s downgrade of SBI and Crisil (partly owned by S&P) suggesting that R56,000 crore of bank loans to the power sector were in danger of going bad in the next 18 months if no reforms were carried out. But saying the reports are an “effort to destabilise our banking system”, as the financial services secretary has been quoted as saying, is a stretch.
The Crisil report first, although both are related. It is unclear what data the financial services secretary is looking at when he says there is no crisis-like situation in the power sector, but with losses rising from around R15,000 crore in 2006-07 to R52,000 crore in 2010-11 and projected to rise to R1,16,000 crore in 2014-15, large defaults are the natural result. The Karnataka Power Corporation is owed R5,000 crore, Adani Power has sent a discontinuation notice to the UP government for 400-600 MW of power supply as it has overdues of R500 crore, BSES which operates in tiny Delhi has just been told by the Supreme Court that it had better pay its dues, Tamil Nadu has sought a R40,000 crore bailout package to clear R45,000 crore (http://www.financial express.com/news/fe-editorial-shortcircuiting-banks/863033/). Two brand new projects, Tata and Anil Ambani’s 4,000 MW UMPPs, can’t produce power unless tariffs are dramatically hiked—Ambani has not drawn funds from banks, but Tata may not be able to repay debt if the issue is not resolved. When the defaults happen, Standard Chartered Equity Research has numbers on how different banks will be impacted—the bank has, however, escaped the ministry’s ire!
At a time when loans are stressed—SBI’s fresh NPAs rose from R3,153 crore in Q3FY11 to R5,645 crore in Q4FY11 and R6,180 crore in Q1FY12—downgrading SBI seems a bit of a no-brainer. The fact that SBI’s tier-1 capital is down to 7.6% is worrying, more so when RBI is looking to get all banks to a 9% level. If SBI has excessively depreciated, just to get more funds from government as the finance ministry has suggested, Moody’s can hardly be blamed—action has to be taken against SBI. In any case, the issue is more complex. At even an 8% capital adequacy, over the next five years, PSU banks need another R5,30,000 crore of capital if credit is to grow at 20-21% each year—the government is too cash-strapped to provide this and too uncomfortable with markets to allow banks to raise this from stock markets. Over a period of time, more PSU banks will have to be downgraded. All of this can change with a fresh burst of reforms, but rating agencies, and investors in general, need to see this.
A combination of assurances and venting ire is a poor substitute.