Gulf countries reject SBI’s letters of credit, cite inadequate credit rating

Dheeraj Tiwari, ET Bureau | 11 Jun, 2014, 06.23AM 

NEW DELHI: Some Middle Eastern countries, including Qatar, have refused to accept the letters of credit (LC) issued by the country's largest bank, State Bank of India, saying that the bank does not have adequate credit rating. 

This can increase the cost of imports from these countries as buyers will need to furnish costlier LCs issued by foreign banks. Qatar is one of the biggest source of gas for India. 

SBI chairman Arundhati Bhattacharya said there was an issue which has now been resolved. "There was this issue some time back wherein they required LCs issued by AAA banks, but we explained that the bank is bound by the country's rating," she said. Standard & Poor's had downgraded SBI in 2012 to BBB-, the lowest investment grade rating, on expected deterioration in its asset quality. 

A senior finance ministry official said that the Qatar government wasn't yet convinced and that talks were on to solve the differences. "We are actively in talks with other countries as well so that there is no issue," he added, requesting anonymity. 

LCs enable buyers to take delivery of goods without upfront payment and sellers to receive immediate payment soon after goods are shipped. 

"This could easily spread to other GCC (Gulf Cooperation Council) countries, so it is pertinent that the government intervene and sort out the issue before it leads to trade imbalance," said KPMG (India) partner and head of banking practice Harshvardhan Bisht.

India's banks have seen their ratings lowered following a sharp spike in non-performing loans be cause of an economic slowdown. In September 2013, ratings firm Moody's lowered its outlook on SBI's D+ financial strength rating to negative, citing asset quality and recapitalisation concerns. 

It had simultaneously downgraded the senior unsecured debt and local currency deposit ratings of SBI to Baa3 from Baa2, citing slowing growth and need for fresh capital. 

Non-performing assets of staterun banks rose to 4.44 per cent of their gross loans at the end of March 2014 from 2.32 per cent three years earlier. In its report, India Banking Outlook 2014: Little Respite in Sight, S&P said its outlook on the banks that it rates in India is negative to reflect the outlook on the sovereign credit rating on India. S&P has a negative outlook on India's BBB-minus rating. 

"We do not rate banks above the sovereign in India due to the direct and indirect influence of sovereign stress on banks," it noted in its report. India's 26 state-run banks will together need about Rs 4.15 lakh crore in fresh capital to be able to maintain lending growth under the Basel guidelines. The government is unable to meet this demand because of its own weak fiscal position.

SBI to merge five subsidiary banks with itself as it prepares to fund the Economy

Sangita Mehta & MC Govardhana Rangan, ET :11 June 2014

MUMBAI: State Bank of India, the nation's biggest lender, will kick off consolidation in the banking industry by combining five associate banks as it prepares to fund the economy that is on the cusp of a strong growth like China two decades ago.

The combination of the associates will enhance the asset base of SBI to Rs 21.9 lakh crore, and add 5,658 branches to its 15,143 branches. The combined market share will rise to 24%, from 19%, making it a formidable force. "The timing is very conducive now," SBI Chairman Arundhati Bhattacharya told ET.

"When I came in, there were a number of fires in the parent itself. So if you have to do something, first you need to look at the mother ship. Once the mother ship is in a better form, then obviously you can start looking at other areas. So I think that time has come, or it is approaching," said SBI Chairman Arundhati Bhattacharya.

She called for changes in a number of laws enacted by the previous government, including the land acquisition Act and the companies Act.

"While it (land acquisition Act) has done a good thing to ensure that land owners get adequate recompense, the process has become very long (the relief and rehabilitation process is too difficult to negotiate). Second, the labour laws. Third, in the new Companies Act there are various features that makes it so draconian that it is difficult to source independent members for the board," she said. Commenting on one of the major issues facing the banking sector — fresh capital of $50 billion, Bhattacharya said the amount was needed over five years. Further, as the economy turned around, the profitability of the sector would improve and these profits would boost capital. "...there are a number of innovative ways of raising capital. There is quasi equity that can be raised. Of course, the government may allow some amount of reduction of their shares to allow banks to raise capital from market. That may happen for stronger banks."

The state-dominated Indian banking system is tiny compared with developed markets, or China which has built up giant lenders in the past two decades. The market capitalisation of the Indian banking industry is estimated at about $185 billion, compared with China's largest bank ICBC's value of $217 billion, data from Bloomberg shows. The asset size is insignificant as well. "Three of the top ten banks in the world are Chinese," said Bhattacharya. "Why did that happen? Because the Chinese economy grew and therefore the banks had to grow in order to provide credit. Similarly, things will happen in India if the economy grows. India will need bigger banks. Now, to build bigger banks organically is very difficult. So to do it in an inorganic way by clubbing some of the banks will probably be the best route."

SBI's five associates are State Bank of TravancoreState Bank of Hyderabad, State Bank of Patiala, State Bank of Bikaner & Jaipur and State Bank of Mysore. Although consolidation was first mooted about a decade ago, nothing much happened with the staff unions being a stumbling block, and the previous United Progressive Alliance's policy inertia.

"This will not be an easy process given the strength of the bank unions," says Anil Agarwal, analyst at Morgan Stanley in a recent report. "But if the government is able to take this bold step, it will help improve industry profitability meaningfully."After a lot of effort, SBI integrated two associates — State Bank of Saurashtra and State Bank of Indore —with itself in the past decade.

Although consolidation was first mooted about a decade ago, nothing much happened with the staff unions being a stumbling block, and the previous United Progressive Alliance's policy inertia, said the ET report.

As per the ET report, the state-dominated Indian banking system is tiny compared with developed markets, or China which has built up giant lenders in the past two decades.

The market capitalisation of the Indian banking industry is estimated at about $185 billion, compared with China's largest bank ICBC's value of $217 billion, data from Bloomberg shows.