State Bank of India after Moody’s Downgrade – an Analysis

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State Bank of India

State Bank of India Mumbai LHO.
State Bank of India Mumbai LHO. | Source
SBI - share price movement
SBI - share price movement | Source
seal of Imperial Bank of India.
seal of Imperial Bank of India. | Source

State Bank of India

Cordial relationship with RBI now

State Bank of India’s profits for the last quarter was suppressed by the provisions it had to make towards employee costs and teaser home loan. State Bank of India invited a controversy with the Reserve Bank of India because of its teaser home loans. The previous CMD of the bank boldly stood by his principle and even criticised Reserve Bank of India for questioning the veracity of the loan. This invited anger from the Reserve Bank of India. Though the present CMD has made amends and established a cordial relationship with RBI, the anger continued and State Bank of India was asked to make huge provisions. This dented its profits albeit notionally. Now State Bank of India has decided to waive penalty for pre-payment of the home loans. Earlier, the bank was charging penalty for pre-payment of home loans availed with floating interest rates taken before May 2011. Now the bank is making no discrimination between old and new customers. Other banks are also bound to follow suit.

Italian loans may see a default

State Bank of India and ICICI Bank run the most extensive global networks among all the private and public sector banks in India. State Bank of India has 64 foreign offices at the end of August. State Bank of India also has the highest number of branches in India compared to any other bank. It has over 10000 branches in India. The bank was started when India was a British Colony. It was then called as Imperial Bank of India. Because of its extensive foreign network, the bank can easily raise money abroad for its operations. But the Managing Director, International Banking Group Hemant Contractor categorically stated that the bank had no intention of raising any money from abroad during the current quarter. State Bank of India has no exposure to the troubled Greece but it has sanctioned some short term trade finance to European countries like Germany, Britain and Italy. Italy is experiencing debt burden now and may default on this loan. The bank is planning to tap home loan market in Bangladesh.

SBI needs urgent capital for expansion

The Chairman of SBI Pratip Chaudhuri has stated that the NPAs of the bank could move up due to stress in the economy. This is a cause of concern. Asset quality of the bank continues to slip. Bad loans are a damper to its results. The Finance Minister is weighing warrants to infuse capital into SBI. SBI Chief is telling that Planning Commission nod is needed for capital infusion. The Central government has plans to infuse capital amounting to Rs.3000 to Rs.4000 crore into SBI. The bank feels its tier-I capital low. State Bank of India has to augment capital for expansion as growing NPAs will eat away its capital adequacy.

CRR and SLR needed even now

SBI Chairman wants to do away with Cash Reserve Ratio. Cash Reserve Ratio and Statutory Liquidity Ratio were introduced by the Reserve Bank of India in the heydays of social banking. Many economists feel that in the present day situation when social banking has turned into commercial banking, there is no need for such ratios. But I beg to differ. These ratios ensure the safety of the banks to a great extent. Of course the entire net worth of Indian Bank was wiped out because of the bad loans inspite of these ratios. That was an exception. It was a daylight robbery indulged by the Indian Bank management in collusion with the Reserve Bank of India and Tamil Nadu politicians.

100 overseas branches to be opened

By March next year, SBI is likely to get funds amounting to Rs.8000 crore through infusion of funds by the government and also through raising capital through issue of various instruments. State Bank of India is also planning to open 100 overseas branches in the next two years. The bank anticipates a 100-125 basis points rise in cost of its savings bank funds. Will the bank be successful in raising capital after the degrading of its stature by Moody’s? State Bank of India enjoys an excellent brand image. It will be successful in easily tapping funds at minimum interest rate.

Home loans and auto loans affected most

State Bank of India should not raise interest rates simply because of the RBI policy of raising rates in every monetary policy in the name of combating inflation. It should first examine the asset quality and credit growth before taking a final decision. It is altogether a different thing that the bank is losing fast its ability to pass on any rate hike to its borrowers. Because of the RBI’s policy of raising interest rates periodically, economic growth has been affected in India. As home loans and auto loans have become costlier, many borrowers are postponing their house or car purchase.

Invest at declines

Investors may acquire the shares of SBI at declines, ideally at below Rs.1500 for medium term holding to get decent returns.

Glitch in Online SBI

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