The downgrade of State Bank of India's standalone rating of credit worthiness by Moody's Investor Services last week needs to be understood in its proper perspective. The agency, one of the big three — Standard & Poor's and Fitch Ratings are the others — cut the rating on SBI's financial strength to D-plus from C-minus, reflecting its concern over the Bank's capital adequacy as well as deteriorating asset quality. Indian stock markets, which have been on a roller coaster ride over an extended period, lurched downwards after the announcement, with bank stocks in general coming under intense pressure. SBI is by far the biggest commercial bank in the country, accounting for more than a fourth of total banking business. While it is, therefore, easy to exaggerate the significance of the downgrade, a few facts need to be borne in mind. The downgrading will indeed affect SBI's standing in global financial markets. But almost 95 per cent of SBI's business is within India. Granting that there will be a “ripple effect” — as the higher costs of new foreign currency loans trickle down to the domestic sector — SBI will be able to provide foreign currency support to its clients at competitive rates. Moreover, as the SBI Chairman has said, the revised rating is still of investment grade, and is no worse than that of other public sector banks.
Several banks on either side of the Atlantic have faced downgrades recently as they reel under the European debt crisis. Yet that is small comfort for SBI simply because the reasons here are very different. SBI, which is government-owned to an extent of almost 60 per cent, has been, for close to a year, contemplating a rights share issue of about Rs.23,000 crore to shore up its capital base. It is stalled by the government's inability to find money to put up its share of the rights issue. The government realises it has to do so for sustaining its majority ownership and also because SBI's tier-I capital has fallen below the regulatory norm of 8 per cent, to which the government is committed. SBI also faces the twin problems of higher interest rates and deteriorating asset quality. If the bank had gone through with the capital raising effort, these pressures would have been well under control; there would have been no question of a downgrade. Even as the government is planning to infuse emergency capital, it needs to be emphasised that SBI and a few other public sector banks would have absolutely no difficulty in mobilising resources from the capital market at very attractive rates. It is the imperative to preserve government majority ownership that stands in their way.