SBI's downgrade is Moody's thumbs down to FM, economy

Rating agency Moody’s downgrade of State Bank of India’s (SBI’s) financial strength rating (BFSR) from C- to D+ is really a rap on the knuckles for government ownership of the country’s biggest bank. It is also a comment on the country’s slipping economy, since the SBI is really a proxy for the Indian economy.

As soon as the news broke, the SBI share fell 5 percent and the Sensex tanked. Around 2pm, the index was down over 300 points to 15,848.

The BSE Bankex had dropped 3.4 percent, and top banking shares were down in the range of 2 to 4 percent. ICICI Bank lost 4 percent in an immediate reaction.

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[caption id=“attachment_98991” align=“alignleft” width=“380” caption=“he Moody’s downgrade is the result of worries about the SBI’s capital adequacy in the face of a rapid deterioration in asset quality. AFP”]  [/caption]

The Moody’s downgrade is the result of worries about the SBI’s capital adequacy in the face of a rapid deterioration in asset quality - something which can be remedied only with a capital infusion, which a cash-strapped government is dilly-dallying over.

A Moody’s statement attributed to Beatrice Woo, Vice-President and Senior Credit Officer, says: “The rating action considers SBI’s capital situation and deteriorating asset quality. Our expectations that non-performing assets (NPA) are likely to continue rising in the near term - due to higher interest rates and a slower economy - have caused us to adopt a negative view on SBI’s creditworthiness.”

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With a Tier 1 capital (equity and reserves) of 7.6 percent of risk assets as on 30 June 2011 - well below the government’s commitment of 8 percent in public sector banks - Moody’s finds that this is not good enough to fund growth and provision for bad loans in a deteriorating economic climate.

Says Moody: “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,” says Woo.

Translated this is what Moody’s is saying: the government knows SBI needs capital, so why this delay?

“Given that a bank’s ability to freely access the capital markets is an important rating criterion globally, we therefore believe a lower BFSR for SBI is warranted, especially as these circumstances are likely to recur,” says Woo.

Moody’s lack of faith in SBI’s ability to boost capital quickly is essentially a lack of faith in the government’s finances. At the start of the year, the SBI chairman had expressed the hope that he would raise Rs 20,000 crore in equity, but the government is unwilling to commit its share of the capital - around 59 percent of the total, or nearly Rs 12,000 crore - to let SBI breathe easy.

According to a report in The Economic Times, the finance ministry, which is the effective owner of all public sector banks, wants to look atSBI’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. But Moody’s downgrade suggests this isn’t so.

In an August report, the newspaper quoted a finance ministry official 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.”

However, the real problem is that Finance Minister Pranab Mukherjee has grossly underprovided for bank recapitalisation in his 20011-12 budget. The total money available is just around Rs 6,000 crore, which is simply not enough to even fund the SBI’s rights issue, let alone fund other public sector banks.

SBI is paying the price for being a public sector bank.