SBI hopes govt will act fast on fund injection after downgrade

Seeking to downplay the impact of the downgrade by Moody's, the country's largest lender SBI on Wednesday admitted that the action will marginally increase medium term borrowing costs, and said it is a "reminder" to the government to urgently capitalise it.

"If you want to put a number to that (escalation in cost of fund raising) and if you do a detailed calculation, it would be two basis points," State Bank of India Chairman Pratip Chaudhuri told reporters when asked about the impact on the downgrade on the bank's fund raising plans.

But the bank's MD for international operations Hemant Contractor was quick to add that the downgrade will have little material impact as "the bank does not have any immediate plan to visit the market to raise medium term debt."

Flanked by the entire top management, Chaudhuri drew attention to fast-tracking the bank's long-pending request to come out with a rights issue to augment the capital.

"I think it is a reminder to the bank and to all the shareholders that the recapitalisation measures of SBI acquire greater urgency," he said, adding that he hopes the fund infusion to be completed by December or latest by March 2012.

The government holds 59.4 percent stake in the USD 200-billion bank and any from of capital infusion will require the government coughing up as much as this.

The chairman explained that the downgrade applies only to USD 625 million perpetual debt raised in two tranches in 2007 for 10 years, and added that the instrument is "obsolete" now as Basel III does not consider it to be part of Tier I capital.

As of June 30, SBI's core or tier-I capital stood at 7.6 percent, which is below the mandated level of 8 percent, and Moody's specifically pointed out in its report on Tuesday to the low level of capital and concerns over asset quality as rationale for the downgrade, which the bank's CFO

and MD Diwakar Gupta described as "quite unexpected."

But the market was not assured enough and the SBI counter shed another 4.23 percent today and closed at Rs 1,711.15 on the BSE which closed down 0.5 per cent.

On Tuesday, Moody's donwgraded its rating of SBI financial strength by one notch to 'D+' from C- on account of the lender's low Tier-I capital ratio and deteriorating asset quality.

"The medium and long term position of the bank both in regard to capital and with regard to NPA is satisfactory," Chaudhuri said, adding he expects the adverse rating action to be reversed once the capitalisation happens.

As of Q1, the lender had a net NPA of 3.52 per cent, which is a three-year high. Gupta suggested that the downgrade can help the bank in speeding up its request for capital infusion.

"Out of every crisis comes some good," he said, adding that the capital infusion can come in any form, including a follow-on offer, or institutional placement, apart from the rights issue.

When asked what is the Plan-B in case the rights issue does not come by considering the precarious financials of the government, which recently decided to borrow an additional Rs 52,900 crore (Rs 529 billion) from the markets, Chaudhuri quipped, "there is no Plan-B at all."

On the rights issue, Chaudhuri further said the bank has given the government different scenarios of fund requirement ranging from 14,000 to 21,000 crore (Rs 140 to 210 billion) over a five-year period.

But for this fiscal, he said the bank needs anything between Rs 3,000 and Rs 10,000 crore (Rs 30 to 100 billion).

"We have asked for this depending on the level of capitalisation at 8 percent and 9 percent and what the government holding would be.

"For 9 percent tier I, if we project 15 percent credit growth, the amount required from the government will be Rs 10,000 crore (Rs 100 billion)," he said adding the rest could be taken care of by the surpluses earned during this year.