beyondbrics

When is $1bn not quite enough?

When you are India’s largest single lender, your balance sheet is around $250bn, your tier-1 capital adequacy ratio is under 8 per cent, your stock lost 42 per cent of its value last year (nearly double the decline in the market), and your non-performing assets are growing.

That’s the position of the government-controlled State Bank of India, which on Thursday night said it would be receiving a likely Rs50bn-Rs60bn ($948.6bn-$1.14bn) capital infusion from the state by the end of March, according to the Economic Times.

Not bad, right? But not necessarily good either, analysts told beyondbrics, considering that SBI had originally requested around Rs200bn, and that the amount offered is likely to get the bank through only the following two or three quarters.

“In two quarters, after the bank has expanded the balance sheet, that capital adequacy ratio will again come down, and again raise the same questions about whether the bank has enough capital,” said Rajiv Mehta, banking analyst at IIFL. “[The Rs 200bn that the bank had originally requested] would have… resolved the question of capital for next two or three years, but this just resolves it in the near-term.”

Unfortunately, the government simply doesn’t have the money to extend the full amount to the bank, in which it owns a 59 per cent stake. Included in the myriad economic problems of the Indian economy is a ballooning fiscal deficit, once targeted by the government to shrink from 5.1 per cent of GDP in the fiscal year ending March 2011 to 4.6 per cent for the year ending March 2012.

Instead it is likely to clock in closer to 6 per cent. With foreign inflows drying up and market conditions weak – making it impossible for the government to enact its ambitious plan to divest itself of $7.7bn in equity in its listed state-controlled companies – Rs60bn was about all it could muster.

Mehta said the government’s finances are unlikely to be in much better shape once this money runs out.

“I think that at that point the situation will be more complex than we are at today because at that point things might be worse and I’m sure the government’s options to fund SBI would be more limited,” he said. “In that case, SBI would have to grow much slower than [the] rest of [the] banking system and it obviously has to be at the mercy of the government at that point in time.”

Being at the government’s mercy isn’t comforting given that SBI’s tier-1 capital-adequacy ratio was 7.47 per cent as of the quarter ending in September – below the 8 per cent threshold most Indian banks, and the government prefer, although it was well above the 6 per cent of Basel II norms.

Worse, the SBI balance sheet seems to have a new NPA cropping up every day.  A new problem loan was revealed on Friday when the Times of India reported that the outstanding exposure of the bank to Kingfisher Airlines, the debt-ridden carrier was Rs 15.8bn, making SBI the single largest lender.

“And I don’t think [the bank’s NPA situation] is likely to improve – it’s likely to deteriorate,” Mehta told beyondbrics. “When you have a well-known company like Kingfisher becoming a non-performing asset, there could be small and medium enterprises that could be under more stress and could become NPAs as well.”

SBI’s gross non-performing assets rose from 3.4 per cent for the quarter ending September 2010 to 4.2 per cent of total debt for the same period this year – underperforming the rest of the sector – and took on an additional $1.23bn in gross NPAs during the quarter.

It paints a dire picture, but there are those who say that the government is simply doing what is possible, and that things could get better for the bank in this new year.

“The government is cash strapped so they’re just providing enough cash for [3-to-4 quarters] and if the market conditions are conducive next year then [SBI] will look for a follow-on public offer,” said Vaibhav Agarwal, banking analyst at Angel Broking.

Indeed, as the WSJ reported, Pratip Chaudhuri, SBI’s chairman, said yesterday, “that the bank may raise further capital next fiscal year through a follow-on share sale or a private sale of shares to institutional investors”.

SBI said it could not comment for this article on Friday, but odds are, they’re hoping to raise more than $1bn the state seems able to supply.