And now, the SBI shock PDF Print E-mail
Wednesday, 05 October 2011 00:00
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State Bank of India’s chairman Pratip Chaudhuri must be cursing his luck. The higher provisions SBI made immediately after his predecessor OP Bhatt left would have helped make the balance sheet look a lot better when Chaudhuri’s term came to an end, but Moody’s downgrade has put paid to that. Indeed, Moody’s thinks it will get worse, which is why its hybrid debt rating outlook is negative. While downgrading SBI from C- to D+, Moody’s has said “SBI’s ability to absorb losses in a stress situation is below that of the C-rated Indian banks”.

It’s easy to dismiss Moody's ratings as that of a credit rating agency that’s downgrading overtime to try and make up for its failure to downgrade troubled US financial institutions in the run up to the global financial crisis. This, of course, is partially true. Downgrading a PSU bank of SBI’s stature looks strange, since the bank is backed by the government, but the reasoning looks solid. At 7.6% after the latest results, SBI’s tier-1 capital is well below the 8% RBI is comfortable with, or the 9% it is striving for. Sure, the government will recapitalise SBI, but the bank’s R23,000 crore rights issue has been pending for around a year now, and there is no certainty as to when the government plans to give it the necessary funds—the fresh burden on the exchequer has only raised the uncertainty. As Moody’s put it, “Notwithstanding our expectations that SBI’s capital ratios will soon be restored through a capital infusion by the government, SBI’s efforts to secure this capital for the better part of the year demonstrates the bank’s limited ability to manage its capital.”

The problem is likely to get more serious in future, and not just for SBI. For one, as the economy comes out of a high-growth phase, NPAs are likely to rise across the board—SBI’s fresh NPAs rose to R6,180 crore in Q1FY12 as compared to R5,645 crore in Q4FY11 and R3,153 crore in Q3FY11. In the last quarter, another R1,048 crore had to be written off on account of investment depreciation—if RBI continues to hike rates, this will continue. More important is the increase in capital needs of the PSU banking sector, including SBI, in the years to come. Assuming a 20-21% annual credit growth, the banking sector will need around R8,00,000 crore of additional tier-1 capital in the next five years—about two-thirds of this will be on account of PSU banks. At a 9% capital adequacy, the capital requirement for the industry will be R9,00,000 crore. Immediately, you can expect banks to be a lot more cautious about lending as well as a hike in GSec rates as the market gets a fix on the increased capital needs.

Last Updated ( Friday, 25 November 2011 06:28 )

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