For all the righteous indignation over the actions of global rating agencies, the Government cannot absolve itself of blame in the recent Moody's downgrade of the State Bank of India's (SBI) creditworthiness from ‘C-' to ‘D+'. For over a year now, the country's No. 1 commercial bank has been wanting to raise about Rs 20,000 crore through a rights issue. This money has been sought not just for expanding operations, but also to beef up its capital base. SBI's tier-I capital — the primary cushion for depositors' money — had fallen by two percentage points in the space of three months from December 2010 to March 2011, and further to 7.6 per cent by June. The fact that this was below the regulatory requirement of such capital being at least eight per cent of a bank's assets, suitably adjusted for riskiness, was known. The Government — which owns 59.4 per cent of SBI and considers the bank as its flagship operating vehicle — was duty-bound to contribute its due share of the money necessary to meet the required capital adequacy norms. It has to be rapped for not doing so, especially in a deteriorating external environment.

To that extent, Moody's announcement lowering SBI's bank financial strength rating by a notch should be seen as a timely reprimand. It is a reflection more on the Government's tardy decision-making process than on SBI's financials per se . It was, indeed, a trifle amusing to see the Finance Ministry asking the SBI for an analysis of the downgrade — much in the manner of an offender demanding a first information report from the victim. The rating downgrade may not actually hurt SBI much. Even if overseas fund-raising costs go up, it is unlikely to cripple the bank, as borrowings outside India account for hardly 5.5 per cent of its balance sheet. And even within that, the ratings would apply to a very small portion of what constitutes so-called perpetual debt (currently around $625 million, on which the coupon is fixed; meaning, the problem would arise only in fresh rounds of financing). If at all fund-raising proves a shade costlier, it would be more due to the general tightness in global financial markets than the rating downgrade itself. To illustrate, SBI, in 2007, was able to mop up 10-year money at just 70 basis points (bps) above the rate at which banks lend to one another (LIBOR). But in 2010, it was forced to pay LIBOR plus 200 bps for a five-year paper. This was in spite of its rating remaining the same over these two periods. And today, nobody in the country can borrow at less than LIBOR plus 300 bps.

The SBI fiasco is yet another demonstration of the drift in policy-making evident for some time now. The Government must make up its mind fast. Either it keeps its side of the bargain by subscribing to a rights issue or allows its stake in SBI to fall to 51 per cent or even less. Will the Finance Minister get cracking, please?

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