By the skin of its teeth, State Bank of India (SBI) will manage to end the current year with a tier I capital adequacy ratio of 8%. The bank announced on Thursday it would be issuing shares to the government, on a preferential basis, to pick up R7,900 crore at a price of around R2,192 per share. Once that happens, Moodys may be somewhat mollified and take a fresh look at SBIs rating though it may nonetheless refrain from upgrading the bank on concerns over NPAs. Its a shame that the countrys premier bank was downgraded by a rating agency and that it has had to live with a shortage of capital for so many months. The government should either come up with a concrete plan for capitalising public sector banks (PSB) or it should let go of some control. Going by the rate at which PSBs are queueing up before the Life Insurance Corporation (LIC) to make preferential allotments, the insurer will soon become a major stakeholder in banks. If the government cant cough up the capital but wants to retain control, it only means that banks will be forced to grow at a slower pace. A back of the envelope calculation shows that if the risk-weighted assets of PSBs increase at, say 15% compounded annually, for the next five yearsa conservative estimate if GDP grows at 8%they would require additional capital to the tune of R5.4 lakh crore. If banks grow their balance sheets at faster than 15% compounded, then the capital required would be even more. The governments finances may not perenially be in a shambles, but its hard to figure out how it intends to come up with its share of capital. As it is stock markets can be volatile and so banks, whether in the public or private sector, need to be able to time their money-raising programmes well in order to be able to sell shares at the best premium.
The good news is that scheduled commercial banks in India are reasonably well-capitalised. In its latest Financial Stability Report of December 2011,RBI observed that while the capital to risk weighted assets ratio (CRAR) continued to slideit fell from 14.5% at the end of March, 2010 to 13.5% at the end of September 2011it was well above the regulatory minimum required by both Basel-I and Basel II norms. Nonetheless, the central bank pointed out that India was lagging peer group countries. Since Basel III will call for tighter capital adequacy norms, the government had better find the money soon. Else, the countrys GDP growth rate itself will be called into question because the PSBs wont be able to lend enough.