Sunday, October 30, 2011

Downgrade of SBI rating: Something to bank on?

On 13th October 2011, Management Invitation Lecture Series or MILS, the flagship event of Department of Management Studies (DoMS), IIT Madras, invited Mr. M.S. Sundara Rajan, former chairman and managing director of Indian Bank, for a lecture on Moody’s Downgrading of SBI Rating.
Mr. Rajan started with an overview of SBI, emphasizing on its historic value and how it came into existence. He said that it is the no.1 bank in India with over 2 lakh employees and more than 16000 branches and it is also known as the “Big Brother” of the Indian Banking System. The Government holds 59% stake in SBI, making it a Government of India undertaking.
Reasons for Downgrading
Before quoting the reasons, Mr. Rajan presented some facts related to downgrading. The rating was downgraded from C- to D+. He said that the factors that were cited by Moody were low Tier-1 Capital ratio and deteriorating asset quality. Also, rise in bank’s non-performing assets (NPA) made Moody adopt a negative view on SBI.
He said that the reasons for downgrading are a result of two primary concerns, sufficiency of capital and asset quality. He also talked about how restructured assets can partly slip into an NPA and the effect of this slipping on the gross NPA ratio. When it comes to capital adequacy, he stressed on the fact that there is a conservative requirement of 23000 crores, but the government has a budgetary provision of 6000 crores only.
Industry Impacts and Management Response
The ways in which the industry can be impacted were also elucidated. Mr. Rajan said that the SBI may only prefer to lend to highly rated companies and other PSBs may also follow the same path. As a result lower rated borrowers may prefer to move to other lenders which might lead to unstructured borrowing by the companies, he said.
Furthermore, he drew our attention towards the way the SBI management has responded. He quoted that as per SBI, the market is over-reacting and stress is only in a few sectors, namely exports, agriculture and SME, leaving the corporate sector unaffected.
DOs and Don’ts for budding managers
Apart from giving his views on the downgrading, he also emphasized on how budding managers should prepare themselves for the future. He said that as young managers, we should enjoy the work that we do and develop multi-tasking capabilities. He urged the young generation to develop self-belief and confidence. He also stressed on the importance of having a stress-free mind.
Mr. Rajan’s lively and informative speech really captivated the audience.

Contributed by: 
Aditya Ghai
Class of 2013

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