Jan. 31 (Bloomberg) -- State Bank of India, the nation’s largest lender, will receive a 79 billion rupee ($1.6 billion) capital infusion from the government, ending a two-year wait for funds as slowing economic growth leads to a rise in bad loans.
The state-owned lender approved selling stock to the government on a preferential basis, according to a filing yesterday to the stock exchange in Mumbai. The lender has been seeking to replenish its base for about two years after increased provisions for defaults and expansion in credit depleted capital.
Shares of State Bank have rallied 27 percent this month on speculation that the funds would be injected in the first quarter. The stock slumped 42 percent last year, and Moody’s Investors Service in October downgraded the Mumbai-based lender’s financial strength rating, citing the capital shortage and its deteriorating asset quality.
“Investors had already factored in the government’s investment into State Bank, leading to the smart bounce back in the share prices in recent weeks,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd. “The key question now is, how the lender will use this capital to boost its lending book in the coming quarters.”
The lender climbed 3.1 percent to 2,047.5 rupees as of 9:48 a.m. in Mumbai. That compared with a 1.1 percent increase in the benchmark Sensitive Index.
The bank’s bad-loan ratio widened to 4.19 percent of total advances as of Sept. 30, from 3.35 percent a year earlier. Its Tier 1 capital ratio, which was below the government’s 8 percent target for state-run lenders, “provides an insufficient cushion” to support growth and to absorb higher credit costs as defaults climb, Moody’s had said in the statement on Oct. 4.
The bank’s Tier I capital will be above 8 percent by March 31, Chief Financial Officer Diwakar Gupta said in a telephone interview today.
“Going ahead, we will be more comfortable with growth as the capital moves up higher than the regulatory requirements,” Gupta said.
India’s government, which owns 59.4 percent of the bank, will inject capital into state-run lenders to ensure they have an 8 percent Tier 1 ratio by March, banking secretary D.K. Mittal said on Oct. 27. The government’s stake in State Bank may increase by 225 basis points after the investment, Gupta said. A basis point is 0.01 percentage point.
The bank planned to cancel untapped credit lines, change how some loans are classified and set up a “capital hunt” panel to review ways to conserve money, Chairman Pratip Chaudhuri said in an interview on Dec. 12.
The Reserve Bank of India’s 13 interest-rate increases since March 2010 caused economic growth in the quarter ended Sept. 30 to slow to the least in more than two years, eroding State Bank’s asset quality.
The central bank also cut the nation’s growth forecast on Jan. 24 to 7 percent for the year through March from the 7.6 percent predicted in October.
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