SBI pays the price for being a govt-owned bank
The finance ministry is planning to play Scrooge on State Bank's capital requirements. And it's share prices are already reflecting this negative impact
If investors need any further proof that having the government as majority shareholder is detrimental to their interests, the State Bank of India (SBI) is Exhibit A.
The bank is 41 percent owned by the public, but their misfortune is that the government owns the balance 59 percent - and is unwilling to chip in with its share of the money to get the bank to grow its business. When you have an elephant sharing your bed, you are likely to be squeezed or crushed.
The bank needs a fresh infusion of capital. It started out with a wish for Rs 20,000 crore, then whittled it down to Rs 10,000-15,000 crore, and may now even have settle for zilch, if the finance ministry's mandarins think the SBI can manage.
Of course, it can. The question is: is it expected to compete in a cut-throat market with finance ministry officials deciding what kind of capital it needs or what its own top management reckons is the right amount?
According to a report in The Economic Times, the finance ministry, which is the effective mai-baap of all public sector banks, wants to look at SBI's books to see if it has overprovided for bad loans. It is hoping that this will be the case and so it may not have to put in extra money this year.
The newspaper quotes a finance ministry as saying: "When we examine the bank's request for funds, we will also take a look at the sudden increase in provisioning and the need for it."
A Business Standard report on Monday put a different spin to the finance ministry's stand. According to it, the ministry has only Rs 6,000 crore to give banks, and it has to figure out how to divvy the stuff between SBI and the rest. In short, the finance ministry is trying to ration the stuff; it is not looking at the SBI's needs.
Either way, the bottomline is clear: SBI will get a fraction of what it wants. The bank may need more capital in a difficult year, but its Owner No 1 is planning to play Scrooge and second-guess its business plan.
State Bank's problems are simple: Thanks to a strong defence of its market share during the term of its last Chairman OP Bhatt (2006-11), the bank ended up with a large share of bad loans. Net result: it has reported two successive quarters of sharply dropping profits,
In the fourth quarter of 2010-11 (January-March), SBI's net profits fell 99 percent. Which means they were practically nothing. In the first quarter of this year (April-June, 2011), net profits again tumbled 46 percent, thanks once against to higher loan loss provisioning.
Actually, there is nothing to be alarmed about, since banks expand credit quickly when the going is good. That's when bad loans build up, but in a competitive scenario you can't avoid that. Expansionary periods are usually followed by quarters of higher provisioning, which is when bad loans have to be written off quickly before growth resumes.
This calls for more capital. Under Reserve Bank regulations, banks have to hold a minimum of 9 percent of their loan assets as capital, and SBI is just over 11 percent now. Of this, 7.6 percent is equity (Tier-1 capital, the rest being long-term loans, or Tier-2 capital), whereas the government want*s banks to have a minimum of 8 percent of Tier-1 capital.
Looking at SBI's predicament, and possible inability to grow its loan-book in the absence of adequate capital, arch-rival ICICI Bank, India's No 2 bank and the largest private sector challenger, has launched a new version of its so-called "teaser" home loans, under which interest rates are fixed for the first two years.
Under OP Bhatt, SBI gained market share in home loans using teaser loans. Now, with the government tightening the purse-strings, it is a safe bet SBI offering market share growth to its rival on a platter.
The markets are already reflecting this growing uncertainty about the SBI's short-term future. While the Sensex has fallen just about 23 percent from its 52-week peak and ICICI Bank has fallen 33 percent, SBI has fallen 41 percent to its current price of around Rs 2,070 on Monday.
Somewhere between the SBI's 41 percent fall and the Sensex's 23 percent lies the price investors pay for owning a share in a government company like SBI.
SBI chairman Pratip Chaudhuri spoke to reporters on Tuesday on the sidelines of a banking conference:
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