Global ratings firm Moody’s on Tuesday downgraded the credit rating of the State Bank of India — the country’s largest lender — sending its shares down and taking with it the Sensex already rattled by global sentiments linked to crisis-hit Greece.
Moody’s blamed the one-notch pull-down to a shortage of capital in SBI to cushion bad loans or contingencies and “weakening asset quality” — shorthand for loans that do not yield interest — which in turn is on account of high interest rates in a slowing economy that has seen borrowing companies suffer.
Rating downgrades usually are caution signals to bond investors. Banking customers needn’t worry.
“This is unlikely to increase borrowing costs or interest rates,” said Rajiv Mehta, banking analyst at India Infoline, who added that SBI's exposure to companies hit by the 2G spectrum scandal was also not a worrying factor despite speculation on that front.
“Our expectations that non-performing assets are likely to continue rising in the near term — due to higher interest rates and a slower economy — have caused us to adopt a negative view on SBI’s creditworthiness,” Beatrice Woo, vice-president and senior credit officer at Moody’s, said as the ratings agency took SBI's grading to D+ from C- .SBI shares slipped 4% to Rs 1,787 on the Bombay Stock Exchange after the downgrade, while the Sensex dropped 1.77% or 302 points to 15,685. As of June, the Capital Adequacy Ratio (CAR) of SBI, which is a measure of the back-up money a bank has to withstand loan uncertainties, stood at 11.6 %. Of this, Tier-I capital, which broadly refers to shareholder equity, stood at 7.6 % - a little below the 8 % desired by the government. SBI is expected to infuse more capital.
Bankers worried about loans going bad met Reserve Bank of India governor Duvvuri Subbarao, urging him to pause on interest hikes effected to squeeze money supply to curtail demand that stokes inflation. The RBI has hiked its policy repo rate 12 times since March 2011 in order to tame high inflation.
“Deterioration in asset quality is an issue and banks are witnessing pressure from textile, steel and related sectors,” said MD Mallya, chairman, Bank of Baroda and chairman, Indian Banks Association.