Strong case for higher govt stake: SBI Chairman

The State Bank of India Chairman, Mr Pratip Chaudhuri, on Monday said there is a strong case for the government to infuse capital in his bank.

The reason: the 18.12 per cent post-tax return that the capital investment will fetch will be far in excess of the cost of the government's borrowing.

“The cost of government borrowing is in the 8-9.5 per cent range. But infusing capital in SBI will give the government a post-tax return of 18.12 per cent,” explained the SBI chief, at a press meet.

The expected capital infusion of Rs 7,900 crore, coupled with a plough-back of profit (the bank has estimated full year profit in the Rs 10,000-11,000 crore range), will see Tier-I capital adequacy (core capital) cross the 9 per cent level by March-end 2011, against the current level of 7.59 per cent, said Mr Chaudhuri.

Will seek re-rating

The capital infusion will see the government's stake in the bank go up to 62 per cent from 59.40 per cent as of December-end 2011.

The bank could leverage the higher government shareholding to raise further capital, either through a follow-on public offer or the qualified institutional placement in the next financial year.

Based on the expected higher capital adequacy ratio, India's largest bank will seek a re-rating from global ratings firm Moody's.

In October 2011, global ratings firm Moody's had downgraded SBI's financial strength rating by a notch to ‘D+' on account of the bank's low Tier-I capital ratio and deteriorating asset quality.

SBI Global Factors

SBI Global Factors Ltd, a subsidiary of State Bank of India, may either be sold to strategic investors or merged with the parent bank, according to Mr Pratip Chaudhuri, Chairman, SBI.

SBI holds 85.39 per cent stake in SBI Global Factor Ltd. The remaining 14.61 per cent stake is held by SIDBI, Bank of Maharashtra and Union Bank of India.

With the Lok Sabha passing the Regulation of Factors (Assignment of Receivables) Bill 2011, the State Bank of India chief observed that the bank may be in a better position to undertake the factoring business in-house.

In the nine months ended December-2011, SBIGFL reported a net loss of Rs 80 crore. However, it turned in a profit of Rs 20 crore in the October-December 2011 period.

The non-banking finance company has a total business of Rs 2,500 crore, said Mr Shyamal Acharya, Deputy Managing Director, SBI.

Capital adequacy

Mr Acharya explained that NBFCs are required to maintain a higher capital adequacy ratio of 15 per cent.

Further, since the NBFC is not a wholly-owned subsidiary, taxation rules do not permit setting off losses against the profit of the bank.

SBIGFL provides factoring (a financial transaction entailing sale of accounts receivable by a business enterprise to a factor — SBI Global Factors Ltd— at a discount) and forfeiting (a financial transaction entailing purchase of accounts receivable from exporters by a forfeiter — SBIGFL).

State Bank of India may raise benchmark size ($1 billion) resources under its medium-term programme only if the cost of borrowing softens to LIBOR plus 225 basis points.