The Moody's rating downgrade of financial strength of State Bank of India (SBI) by one notch to ‘D+' has raised legitimate concerns on the outlook for the Indian banking sector.
“Given the situation of alarmingly rising non-performing asset (NPA) levels, uncertainty over ability to raise capital and infusion of capital by the Government in the face of strained finances, the move could have far reaching implications for the banking sector as a whole,” said Federation of Indian Chambers of Commerce and Industry (FICCI).
Low Tier-I capital ratio and deteriorating asset quality led to lowering of rating for the bank. Concerns over the financial health of the bank had already gained significant traction since its net profit plunged 99 per cent in the last quarter of the previous fiscal due to higher provisioning for bad loans. “Mounting stress on NPAs gave reasons for some to calling it Stressed Bank of India,” FICCI said.
Amid the fragile domestic macroeconomic scenario, loss of investor confidence in SBI's bonds, considered a proxy for the government in financial services, tantamount to a huge systemic risk for the banking system. For Indian banks, the problem is not their high exposure to sovereign debt in the eurozone but home grown.
The growth in NPAs as a percentage of banks' loan portfolio was almost at a five-year high in the first quarter of the fiscal. The situation is likely to aggravate as banks may also have to restructure loans because borrowers are finding it difficult to service because their businesses have been affected by a slowing economy.
Maintaining capital adequacy in a rising NPA scenario is the biggest challenge for public sector banks. The Government has estimated a capital infusion of Rs.2-lakh crore into the state owned banks by 2020. Given the state of Government's finances, capital infusion by the exchequer will put pressure on the already strained fiscal balances whereas raising fresh capital from financial markets in a bearish scenario would entail its own cost for our banks.
As a possible solution, FICCI said that the monetary and fiscal authorities need to work in tandem in addressing the concerns of the banking sector.
Capital infusion by the exchequer in systemically important banks and shift in focus of the central bank from inflation to growth could be part of such a strategy.
Meanwhile Chairman of SBI Pratip Chaudhuri said here that the bank was expecting injection of funds from the Government which owns 59 per cent stake in it. However, Mr. Chaudhari on Wednesday said that the bank had $625 million of perpetual debt, which has a call option in 2017, but the new Basel-III norms no longer recognise perpetual debt as Tier-1 capital.
Perpetual bonds were introduced in 2006 to allow banks raise funds to meet credit demand and fulfil Basel-II capital adequacy requirements without diluting banks' equity base.
SBI's bad debts, as a percentage of its advances, reached a three-year high of 3.52 per cent on June 30 against the industry average of 2.3 per cent as on March 31, 2011.
