State Bank of India rated lower: Does the Indian care?

FICCI comments on the downgrading of India's largest retail bank touching rural and lower middle class lives. SBI is parallel to the post office.

Indian villages need banking services badly. They still store their paper money beneath mattresses over there.

Now who best to provide banking services to people whose complete yearly turnover in their savings bank totals Rs 10,000 or just more than that?

Well, it has to be an organisation, which does not care about huge profits but cares more about following the rules set by the government and in servicing the society.

Currently, Abhijoy Basu, manager at State Bank of India's Gole Market branch in New Delhi pushes the rudimentary steps of banking with minimal staff and barely just infrastructure . He does have a mandate to earn money and make a profit for his organisation. At the same time, he does not refuse business as other banks do with unwritten clauses , undeclared charges and unwelcome stares.

The State Bank of India is a refuge for India's poor who need banking but cannot afford to get the premium services in this sector. So this organisation will carry on in this direction.

The Moody's rating downgrade of financial strength of State Bank of India, India's largest lender, by one notch to 'D+' has raised legitimate concerns on the outlook for the Indian banking sector.

Given the situation of alarmingly rising NPA levels, uncertainty over ability to raise capital and infusion of capital by the Government in face of strained finances, the move could have far reaching implications for the banking sector as a whole.

Low Tier-I capital ratio and deteriorating asset quality led to lowering of rating for country's largest bank. Concerns over the financial health of India's largest bank had already gained significant traction since its net profit plunged 99 per cent in the last quarter of previous fiscal due to higher provisioning for bad loans.

Mounting stress on NPAs gave reasons for some to calling it Stressed Bank of India. Although the resilience of Indian banking sector in withstanding the financial crisis in the past is well established, however, the scenario has changed significantly since then.

Slowing growth, high inflation, high interest rates, squeeze in margins and risks from foreign borrowing have all compositely added tremendous pressure on Indian banks. In addition to these, the ramifications of a possible double dip recession in advanced economies would be far greater this time than 2008-09.

Amid the fragile domestic macroeconomic scenario, loss of investor confidence in SBI's bonds, considered a proxy for the government in financial services tantamount to a huge systemic risk for the banking system.

For Indian banks the problem is not their high exposure to sovereign debt in the Euro zone but home grown. Indian banks' bad debts are rising as India Inc. has started feeling the pinch of high interest rates.

The growth in nonperforming assets (NPAs) as a percentage of banks' loan portfolio was almost at a five-year high in the first quarter of the fiscal. The situation is likely to aggravate as Banks may also have to restructure loans that borrowers are finding difficult to service because their businesses have been affected by a slowing economy.

Maintaining capital adequacy in a rising NPA scenario is the biggest challenge for our Public Sector Banks.

Although Indian banks currently have higher Total CAR against the requirement under Basel III of eight per cent, their Tier I ratio and equity capital base needs to be augmented. Government has estimated a capital infusion of Rs 2 lakh crore into the state owned banks by 2020.

Given the state of Government's finances, capital infusion by the exchequer will put pressure on the already strained fiscal balances whereas raising fresh capital from financial markets in a bearish scenario would entail its own cost for our banks.

As a possible solution, the monetary and fiscal authorities need to work in tandem in addressing the concerns of the banking sector.

Capital infusion by the exchequer in systemically important banks and shift in focus of the central bank from inflation to growth could be part of such a strategy.

Source: EconomicTimes