After ratings downgrade, SBI's fate in government's hands

When someone asked Steve Charlton, an American professional baseball player, about certain past events in his life, he was quick to remark "That's the past. I don't agree with retrospect."

But sometimes it is a good exercise to look back and see how one could have done certain things differently in life or at work. The man who is suddenly dropped in retrospection mode is the six-month old chairman of State Bank of India (SBI) - Pratip Chaudhuri.

Global rating agency Moody's on Tuesday downgraded the bank's perpetual bond rating from C- to D+ on the back of capital raising concerns and also deteriorating asset quality. For SBI executives, the news arrived like a bolt from the blue.

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"I heard about it when I was coming back from the bankers' meet at Reserve Bank of India (RBI) on asset quality," said Pratip Chaudhuri in a hurriedly convened press meet on Wednesday. He was still checking his SMSes and missed calls while addressing the media.

The 58-year old banker has actually found himself caught in his own act. How? A few months back he was showered with praises for cleaning up the books when he aggressively made provisions for non-performing assets (NPAs), pensions and gratuity. These surprise measures, against those of his predecessor O P Bhatt, sucked up capital. But Chaudhuri was not at all bothered.

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What the new chairman did was clearly a good display of adopting the best practices in the country's largest bank. At the same time, what he forget were the mood swings of his partner or largest shareholder - the Government of India - which has a 59 per cent equity stake in the country's largest bank.

Chaudhuri's assumption was that he would get an approval from the government for a Rs 25-30,000 crore rights offer, where the government was to contribute a substantial Rs 15,000-16,000 crore. But that was not to be.

The finance ministry has been dilly-dallying on its commitment to provide long term capital. There is no divestment by the government nor can SBI raise fresh capital because then the government holding would decline.

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Similarly, the government has to contribute fully in a rights offer to keep its holding intact at 59 per cent. So, there is no option but to wait for the government to sign a cheque, which has so far kept mum on the issue.

The rights offer was first conceived in mid-2010 during O P Bhatt's tenure. There was no headway then with files moving to and fro for more than a year. With that kind of a background in mind, Chaudhuri should have been cautious.

In retrospect, he would definitely regret making heavy provisions in quick succession. Chaudhuri should have conserved capital and asked for an extension from RBI for meeting the 70 per cent NPA coverage requirement.

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The strong argument in favor of SBI was its size and also a track record of meeting social obligations and other government commitments. Similarly, there was a strong case for deferring the pension liability by impressing upon the government.

The mandarins at the bank now blame RBI for putting its foot down on provisioning issues. "RBI should also have thought about it," says a top SBI official on condition of anonymity.

In retrospect, O P Bhatt was right in deferring the provisions by taking extensions because there was no certainty from the government to provide capital through the rights offer. Bhatt, who taught the elephant to dance, knew how difficult it was to control the very animal once it goes on a rampage.

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Chaudhuri, for sure, knows that too as he brought half a dozen members of his top management to address the media in a hurriedly convened press conference.

"We are here to answer all your queries," said Chaudhuri.

Assuming there are no major slippages on its assets, the long term capital issue is now going to haunt Chaudhuri for the rest of his tenure. Arch rival ICICI Bank is slowly getting back into growth mode. SBI requires anywhere between Rs 60,000 to Rs 70,000 crore in the next five years to fund its growth requirements.

"We are getting promises for token money of Rs 3,000-Rs 5,000 crore from government, which is too little," says a top official, throwing up his hands in despair. What SBI failed to convey to the government, Moody's has done on their behalf.

And when someone asked about the bank's plan B if the capital doesn't come in from the government in the near future, Chaudhuri was quick to reply - "There is no plan B."

It's now over to government.