Bloomberg News

State Bank of India on ‘Capital Hunt’ as Singh Delays Investment

December 12, 2011

Dec. 13 (Bloomberg) -- State Bank of India, the nation’s largest lender, plans to cancel untapped credit lines and change how some loans are classified to bolster its cushion against losses pending an infusion of government funds, Chairman Pratip Chaudhuri said.

The lender has set up a “capital hunt” panel to review ways to conserve money, Chaudhuri, 58, said in an interview in Mumbai yesterday. The measures, which will include adjusting the risk weightings on loans to companies, may help free up 30 basis points to 100 basis points of risk buffers by March, said Chief Financial Officer Diwakar Gupta, who heads the panel.

State Bank has dropped 37 percent in Mumbai this year as its Tier 1 ratio fell below a government target and bad debts climbed amid an economic slowdown. The lender has been seeking funds from Prime Minister Manmohan Singh’s administration for almost two years to replenish capital depleted by credit growth and increased provisions for defaults on loans.

“The government’s dilly-dallying on the time frame for infusing capital into State Bank leaves them with no choice but to go ahead with this capital hunt,” Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd., said by telephone yesterday. “It remains to be seen whether the bank will be able to free up as much as 1 percentage point of Tier 1 capital through this.”

The bank, based in Mumbai, aims to boost its Tier 1 ratio to more than 9 percent by the end of March, Chaudhuri said. The measure narrowed to 7.47 percent for the three months ended Sept. 30, from 8.9 percent a year earlier. That compared with 13.1 percent at ICICI Bank Ltd., India’s second-largest lender by assets.

Worst Annual Performance

Shares of State Bank dropped 5 percent to 1,772.75 rupees at the close of trading yesterday, while the nation’s benchmark Sensitive Index slid 2.1 percent after the Central Statistical Office said industrial output fell 5.1 percent. The lender is headed for its worst annual performance in three years.

The cost of protecting the debt of State Bank, considered a proxy for the sovereign, has more than doubled this year on concern that tightened monetary policy will slow growth and lead to more bad debts. The credit default swap prices climbed to 361 basis points on Dec. 9, from 161 at the end of last year, according to data provider CMA, which is owned by CME Group Inc. A basis point is 0.01 percentage point.

‘A Bit Profligate’

State Bank’s financial strength rating was downgraded by Moody’s Investors Service in October. The capital ratio is below the government’s 8 percent target for state-run lenders and “provides an insufficient cushion” to support growth and to absorb higher credit costs as defaults climb, the rating company said in the statement on Oct. 4.

“We were a bit profligate with our capital,” Chaudhuri said yesterday. “Now we understand that the capital has to be used very prudently. That is why we are very careful about capital.”

Chaudhuri took the helm of the 205-year-old lender, where he has worked for about 37 years, on April 7. He had overseen international banking operations since April 2009, after previously working in various divisions including corporate lending and the treasury department.

The bank’s bad-loan ratio widened to 4.19 percent of total advances as of Sept. 30 from 3.35 percent a year earlier, as 13 interest-rate increases from the Reserve Bank of India since March 2010 and a slowing economy led to deterioration in State Bank’s asset quality.

Fund Infusion

India, Asia’s third-largest economy, grew 6.9 percent in the three months ended Sept. 30, the slowest pace in more than two years. The Reserve Bank, which has increased borrowing costs by 375 basis points since March 2010, said on Oct. 25 that the monetary tightening will moderate economic expansion and help ease inflation as it signaled a pause in the increases. The central bank is set to review its policy on Dec. 16.

India’s government, which owns 59.4 percent of the bank, will inject capital into its state-run lenders to ensure they have an 8 percent Tier 1 ratio by March, banking secretary D. K. Mittal said on Oct. 27. The government has committed to investing more than 30 billion rupees ($568 million) in State Bank by March, Chaudhuri said yesterday.

State Bank also plans to ask corporate borrowers to seek credit ratings Gupta said. Loans to companies that get an AA rating would allow the bank to lower risk weightings to 50 percent, freeing up some cash, Gupta said.

“‘Capital hunt’ is the nomenclature for what we are doing,” Gupta said. “That is, more effective utilization and conservation of capital.”

--Editors: Chitra Somayaji, Arijit Ghosh

To contact the reporter on this story: Anto Antony in New Delhi at aantony1@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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