SBI to cut government bonds holdings, insure credit to conserve capital

MUMBAI: State Bank of India (SBI) will cut government bond holdings and insure trade credit in an attempt to optimise capital after rating company Moody's downgraded it citing its inability to raise funds and the scope for higher bad loans due to high interest rates.

The downgrade and the subsequent crash in banking stocks in the past two days highlight the potential mess in the Indian banking system dominated by state-run lenders which depend on the government for capital. The spend-thrift government that has already raised its borrowing limit for this fiscal is unable to meet the capital needs.

"It is a reminder to banks and other shareholders that recapitalisation needs a greater emphasis," Pratip Chaudhuri, chairman at SBI, told reporters on Wednesday.

"We are hopeful that the government would infuse Rs 3,000 to Rs 10,000 crore by December and we expect capital to come in latest by March 2012," he added. The bank has asked for Rs 14,000-21,000 crore in three years.

On Tuesday, Moody's lowered SBI's rating to D+ from C- on account of weaker capital and poor asset quality. SBI's gross bad loans was at 3.28%, highest among PSU banks, while its core capital (Tier I) fell below 8% as on March 2011.

To partly neutralise the capital issue, the bank has decided to cover all loans given to exporters under insurance scheme provided by export credit guarantee corporation, which will require it to set aside less capital on the export loans. "We have export credit of Rs 30,000 crore and for this we are setting asideRs 2,400 crore. On taking ECGC cover, we will save Rs 1,200 to Rs 1,400 crore capital," said Chaudhuri.

Secondly, he said that SBI will move towards lending to better rated corporates, a move that would require them to set aside less capital, but may also impact their profit margins as these yield lesser than loans to small companies with lower ratings.

"It may compress margins, but we have excess of government securities to the tune ofRs 40,000 crore and instead of investing in gilts, which are low yielding assets, we would lend at better rates to corporates," he said.

Source: EconomicTimes