State Bank of India (SBI), the country's larget lender, deteriorating asset quality and lower capital adequacy has triggered a downgrade by Moody's Investors Service. The rating firm has downgraded the financial strength rating of the bank from C- to D+. Moody says that they expect Bank NPA's to rise in near term due to higher interest rates and a slower economy. The bank's NPA, as of 30 June 2011, reached a 3-year high of 3.52% of loans. For the system, the ratio was 2.3% as of 31 March 2011.SBI reported a Tier 1 capital ratio of 7.60% as of 30 June 2011, below the level of 8% that the government of India has committed to maintaining in public sector banks (PSB). NPA— as a percentage of the bank's Tier 1 capital ratio— is now about 43%.
The Rs 23,000 crore rights issue that SBI is currently seeking would raise its Tier 1 ratio to approximately 9.30%. However, Moody's estimate that capital deployed for loan growth, assuming 15% per annum for the next three fiscal years, will cause the Tier 1 ratio to fall below 8%, thereby necessitating another capital exercise.
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