Lack of freedom is an attribute that fits in very well in public sector banks' operational aspects
The recent downgrade of State Bank of India by Moody's Investor Service has evoked strong reactions from the markets and policymakers. While predictably the stock markets tanked, a section of the policymakers and bankers has questioned the credentials of the agencies and the rating process.
On October 4, Moody's — one of the big three rating agencies, Standard & Poor's and Fitch Ratings being the other rating agencies — reduced its rating on SBI's financial strength (basically credit worthiness) from C minus to D plus amidst concerns over deteriorating asset quality and adequacy of capital. This has been a season of downgrades. Moody's especially has been on a downgrading spree — a number of banks on either side of the Atlantic have been downgraded. That SBI is just one of the several banks facing the downgrade is no consolation however.
The problems that banks in the advanced countries face are vastly different from what banks such as SBI experience. Almost all of them are reeling under the euro-debt crisis. Many of them had contributed to the global financial crisis through their reckless lending and underwriting practices, especially in the sub-prime home loan mortgage segment.
In contrast, SBI and other banks in India weathered the crisis admirably backed as they were by some enlightened regulation. Whatever the problems SBI is facing now they are certainly not due to past recklessness. Yet, in a rising interest rate scenario and economic slowdown, the quality of its assets has come under strain. The bank has had to make large provisions in the first quarter of the year. That has strained its capital adequacy norm. The Tier-I capital ratio of SBI at 7.6 per cent as on June 30, 2011, is now below the 8 per cent that the government has committed to maintain for public sector banks.
Onus on government
The onus has been on the government, which owns slightly less than 60 per cent stake of SBI. For almost a year now, the bank has been contemplating a Rs.23,000-crore rights issue. If the proposal had materialised, the bank would have easily met the required capital adequacy standards. The snag was that the government, the majority shareholder, was not in a position to take up its rights. At the same time, with a legal commitment to maintain a majority shareholding, the government cannot even contemplate renouncing its shares.
After the downgrade, reports speak of a scaled down rights issue — of about Rs.5,000 crore — a fourth of what was first proposed is planned for December. The government need to invest considerably less but will this limited exercise solve the problem of the bank? Over the short-term, SBI would be able to meet the capital adequacy norm. Despite that, as Moody's pointed out, “SBI's efforts to secure this capital for the better part of the year demonstrates the bank's limited ability to manage its capital…given that a bank's ability to freely access the capital markets is an important rating criterion globally.'' Hence, the downgrade was justified. Looking ahead, Moody's feels that SBI will run into capital constraints soon.
Ownership issue
In other words, SBI is not its own master even in matters as important as raising capital. A lot depends on the government, which brings into focus the much larger issue of government ownership of commercial banks. Is the government ownership of banks a help or a hindrance? After the recent downgrade, SBI's rating is below that of some of the new private banks such as HDFC Bank and ICICI Bank. That is highly unfortunate and to a large extent misleading. SBI has suffered not because of its balance sheet weakness per se, but because its majority owner, the government, is not in a position to contribute to its share in the enhanced capital that is necessary to shore up its balance sheet. Some private sector banks too are facing the problem of rising NPAs in a rising interest rate environment.
The difference is that they have much more flexibility than SBI in raising capital. It needs no special mention that SBI as well as most other public sector banks can tap all the capital they want, both within India and abroad, if only they have the freedom.
In fact the lack of freedom is an attribute that fits in very well in their operational aspects too. Much has been said about the constraints public sector banks work under and those essentially arise out of government ownership. There is, of course, a favourable side to government ownership. In times of crisis, public ownership can instil confidence.
Two examples from India are: Indian Bank and the Unit Trust of India. Their depositors and other stakeholders remained loyal to these institutions. There was no panic or run even though the problems of these were widely publicised. At the global level, the largest banks were saved from ruin during the financial crisis by government intervention which included a large infusion of capital in many cases.
Again it will be the government action, including recapitalisation that may save many iconic banks in the advanced countries reeling under the euro-debt crisis.
Keywords: Moody's Investor Service, SBI downgrade
No doubt unmindful of the downgrading by the top most rating agency State Bank of India enjoys the unshakable confidence of the public at large because of the sovereign guarantee that it enjoys. Though the government is fund starved to shore up the capital to maintain CAR at the required 8%, the government may ponder over other alternatives such as the impact of Merging the remaining Associate Banks such as SBBJ,SBT,SBP and SBM ETC.,
This article clearly lacks depth.Govt is favouring the new upstart private sector banks like HDFC ,ICICI,YES,KOTAK ETC.in the process the neglect on SBI is atrocious.Govt has clean forgotten the social schemes support by SBI and PSU banks.how can the western banking norms apply to India.With eire norms they are already doomed to recession with closure of so many banks.Please decry the role of the rating agencies as money minded doctors' advices or prattle to show their presence to eke out from economy. The views are not correctly evolved as per Indian conditions and are moribund.
Finance Minister can use coercive methods to shut the mouth of rating agency which downgraded SBI's rating as they did to shut the mouth of Ramdeo Baba and his associate as also Team Anna. But the fact is that intrinsic health of all public sector banks is too weak and hence downgrading of rating of not only SBI but all public sector banks is possible. Prominent reasons for health of banks going from bad to worse are many. I mention hereunder a few of them.
1. Quality of bank officers who process and recommend for loan sanction and also that of who accord sanction on any lending proposal is very poor. 2.Bank management , in fact all ministers and all department heads give value to corrupt officer and to flattery culture for their mutual personal greed. 3. There is acute shortage of manpower at many branches and on the contrary there is undue pressure from administrative offices to handle more and more business.4. Legal system to recover money from defaulters is too weak and inefficient.
Arvind, good point about all rating agencies are under Goldman Sachs. Do you know that after S&P has downgraded US's rating their CEO has been removed by the board of directors and the company itself has been acquired by another giant ( Not clear on details). So, is S&P owned by Goldman before or after this acquistion?
Moody's ratings should be taken with a pinch of salt because all 3
rating agencies are controlled by Goldman Sachs/J.P.Morgan et al in
promoting a global financial collapse to wipe out their(U.S)own massive
debt and the preparation for a New dollar regime,having said that this
ratings downgrade opens an window of opportunity to SBI's major owner
operator-the Govt to revamp its process control for better operational
ease and flexibilty backed by its commitment to the people and not for
the politics of freebie's to its supporters
The downgrading of rating will have NO impact on customers. The downgrading is warning of sorts that SBI is not fulfilling one of the criteria related to BASEL 2. A article by Rangarajan on this has highlighted the fact that SBI inability to meet 8% is the main reason the rating has fallen and high NPA solely wouldn't have caused the downturn. Rating agencies are the major culprits for not predicting the 2008 subprime crisis. But that doesn't mean their views should be disregarded. We can only say they aren't fool-proof and their suggestions should be viewed critically. We, Indians,clam up and refute any criticism irrespective of the causes. Atleast there wasn't a uproar like US , but we need to consider the Moodys arguement on merit. A Bank's inability to maintain required amount of Tier-1 cash is a serious block on its ambitions to grow and if neglected could lead to its instability. So,let us acknowledge the fact that SBI doesn't have required freedom and Govt should look into it
From the customer security point of view I will give maximum rating to SBI. Hell with Moody's ratings...Moody's and S&P are just predictable agencies, the set of formula's which are never ever proven by any economic growth and demand. Why people have to agree with them when they failed miserably in predicting US economic crisis?
SBI is in gridlock for capital as 60% owner,govt of India won't dilute
its holding, won't subscribe to rights issue, nor sellout to others.
Moody's have down rated SBI on following grounds,its inability for
last six months to find capital to raise tier I capital to 8% thresh-
hold, its expectation that SBI's NPAs will continue to rise due to
rising interest rates and slowing Indian economy. Full Text of Moody's
report has not been published in papers, Moody only shares it with
privileged few. Whatever is in public domain, points to SBI's failure
to raise tier I capital to 8% during last 6 months , slowing Indian
economy, and expected higher NPA's. Slowing economy, and fear of
higher NPAs due to higher interest rates affect entire banking
industry and are not specific to SBI.The fact is, one of the C- rated
Indian private banks has higher gross percentage of NPAs than SBI.
Internationally, the Moody have been self contradictory. In all other
countries they award higher rating to government backed /owned banks
but in India they are down rating SBI which is 60% owned by GOI
Talking about functional independence of PSU banks, most of the PSU banks are mismanaged as far as HR practices are concerned. Most transfers & postings, especially senior officers in the rank of Scale IV & abvoe, are done for other considerations. Again, in the matter of promotions also, again especially in the rank of Scale IV & above, the same holds good and many disciplinary proceedings are initiated just before the selection process for promotion is initiated ( how one wishes that CVC considers this particular aspect whenver first stage advice is sought by the PSU banks).
The article is very articulate and true picture of the current scenario. It rightly observes that the health of balance sheet of the bank does not effuse any fear the rating company has harped on while degrading, rather if left on its resources and capability the bank is in a much better condition to raise funds than other banks of the country. As for the fear of asset quality of the bank, it is same for all other banks including the private banks in a higher interest rate regime. In fact in terms of percentage ICICI banks fares even worse to the SBI but enjoys a better rating from the same agency. The States Banks inability lies in its control structure which binds the government, legally, to have a majority stake in the bank, so the governmnets inability becomes the banks limiting factor.
The downgrading of the SBI's rating by the Moody's is somewhat a shock to many.During the financial crisis(2008-09),the credibility of rating agencies including the three major agencies-S&P,Fitch Ratings and Moody's-was doubted across the globe.Recently,these three agencies have downgraded the credit ratings of many institutions as well as countries seperately.It's time that rating agencies improve their criteria of ratings that they make to help the investors especially and to the organisations as well.Otherwise these recent steps might put a question mark even on their existence.
The whole article/column has pointed towards operational constraints of PSBs derived from Government ownership.It visibly seems that a case of need of privatisation has been putforth subtly.I am disappointed with the slant view of author.I am of the view that a model should be evolved to bring more operational freedom while at the same time maintaining the bank's identity as a Public Institutions.Recently we have been listening about holding company concept and it seems quite feasible.
There is, of course, a favourable side to government ownership.
Really it is very true that in India no bank is free to make & implement their own policies without interfarance of the Govt.Most of the time Govt.put its political benificial policies over banks in the name of public/social welfare policies e.g. Loan waiving schemes, which results as the huge NPA increase and loss for bank and the most important thing it affects the morale & tendency of the standard borrowers to be a wilful defaulter and compel them not to pay the installment of the loans.
I think that Mr. Narasimhan has taken his analysis a little too far fetched. Remember, that it was the same rating agency that cause the meltdown in the US. What happened then. Their analysis does not take number of factors into account and they also can get carried away with their theory.
What does this mean to an ordinary customer like who has deposited my hard earned life time savings in SBI term deposit. Should I take out my term depsoit pre-meturely losing money and re-invest elsewhere?
Even if SBI were better than its Western counterparts,a downgrade will bring in a bit of caution,what with the UPA behaving fiscally irresponsibly.This also,points to the need of India having her own credit rating agencies,as the US' rating agencies were cited as one the culprits [lack of Integrity] for the economic disaster that struck in 2008..
Nice article....Very useful to understand why SBI was downgraded and what should the government do...thanks hindu!
Please Email the Editor