Rights issue best option: SBI

Pratip Chaudhuri took over the reins at the State Bank of India in April 2011 at a time when persistent high inflation had spooked the growth story. He settled the debate on teaser loans with the Reserve Bank of India, made adequate provisions and started on a clean slate. He reckons the RBI consciously sought demand destruction, so an economic slowdown should not come as a shock. But he is worried about the investment pipeline drying up. In an exclusive interview with Ritu Kant Ojha and P Vaidyanathan Iyer, he said the bank was hopeful it will be able to infuse Rs 5,000 crore before December-end, preferably through a rights issue. “We have given three options to the government. I will not be surprised if it (capital infusion) happens before December,” he said. Excerpts:

What are your fund raising plans in reference to the Rights Issue?

SBI needs capital and there are three routes. If we do a rights Issue then the government holding and the public holding remains the same. In case of a QIP (qualified institutional placement), the government stays behind and non-government entities subscribe to shares. The government holding can come down to 51 per cent from 59.4 per cent now. Or the government can agree to a preferential issue. Here, it puts money and minority shareholders stay away. So, the government holding goes up. The government sees it as a political question – what kind of holding they want to have. In our view, a Rights Issue is the best option since it treats both majority as well as minority shareholders equally.

But the rights issue seems to have been ruled out…

The government is deeply committed and the finance minister has made unequivocal statement on the capitalisation issue. We need the money but in what form is yet to be decided. I will not be surprised if it happens before December.

Do you think a Rights Issue in such depressed and volatile market conditions makes sense?

Somebody may think that Rs 1,800 is a low price. If we require Rs 5,000 crore in capital, whether the price is Rs 1,800 or Rs 2,000 becomes a matter of detail. What is the point of doing an issue at a huge premium. It is not good to come out with an Issue which is at significant premium than the long term sustainable price of a stock.

Recently the government has asked for Life Insurance Corporation (LIC) and other PSUs including banks for buyback of government holdings?

We have some room for equity investments but that is to accommodate all kinds of equity investments. It could be publicly traded, can be our strategic stake in National Stock Exchange or Clearing Corporation of India or may be some primary market investments. We can invest up to 20 per cent of Tier I capital in equities including equity mutual funds.

How much headroom does SBI have?

For SBI, 20 per cent of Tier I would be Rs 14,000 crore. Since we keep buying and selling in the market, at any given point of time we have Rs 3,000 crore to Rs 4,000 crore.

You chose to adequately provide for teaser loans. Does it continue to affect your books?

We are, in fact, getting it back now. SBI had lent about Rs 25,000 crore in teaser loans. The interest rate on the first year was 8 per cent, 9.5 per cent in second and 10.5 per cent in the third year. With each passing year, the provision will come down and the income would go up. There is no residual burden.

Do you see the economy headed for a big slowdown?

The capital goods sector is showing slight slowdown. This may be due to high interest rates or uncertain economic situation. However, projects are getting completed. May be new ground breaking is not happening to the extent it was happening in the last two years. But projects like SAIL’s 5 million tonne additional capacity, Tata Steel’s additional 3-4 million tonnes or NTPC’s 5,000 MW of power capacity addition are happening. But yes the pipe line is drying up. A slowdown in new project originations will come with a lag effect. New project sanctions are relatively on the lower side in large projects.

Inflation has started to taper off. You think we have hit the ceiling in terms of interest rate hike?

Once the Kharif crop hits the market and supply improves, the inflation comes down. RBI may give up its stance. But till the last policy, it said rates will rise. Once you initiate a certain policy action for increasing the rate, it is meant to curb the demand.

Source: Financial Express