Growth of SBI depends on changes to its Act

The government's decision to reduce its shareholding in PSU banks in the recent budget to 33% from 51% is still not applicable for State Bank of India (SBI) as it is governed by the SBI Act. Currently RBI's holding in SBI stands at 59.7% and this cannot be brought below 55% unless changes are made to the SBI Act. SBI (FY99 total income: Rs 19.11 bn) is India's largest bank. It runs the world's largest network of 8,900 branches and controls about 22% of India's loans and deposits.

As SBI is keen to maintain its capital adequacy ratio (CAR) at 12% till 2004, it has asked RBI to infuse Rs 40 bn for this purpose to enable it to expand. The government is not in a position to infuse funds into PSU banks and has hence decided to reduce its stake in these banks. In the case of SBI since the government cannot infuse funds it is seeking changes in the SBI Act so that it can tap the markets and effectively bring down the governments holding.

As the economy is showing signs of a pick up, SBI needs to encash on the growth opportunities that the Indian industry will have over the next couple of years. Hence there is an urgent need to change the SBI Act to maintain its capital adequacy ratio at 12% over the next few years to enable it to grow in line with the economic and industrial growth.

SBI's immediate plans include a Rs 10 bn tier II bond issue to raise its CAR to 12% by March'2000. This issue is slated to happen in the last week of March'2000.

Also as the market for Indian equities is fairly buoyant, SBI is keen to tap the international markets soon for maintaining its CAR. SBI is keen to lodge its issue prospectus for this purpose with regulators by end September failing which it will have to come out with a fresh audited balance sheet for the first half of FY2001. This would possibly delay its growth plans as things would stand postponed.

Given the fact that it will take time to change the SBI Act as this requires parliament's approval when this will happen is yet a question mark.

Market View:
The improving economic scenario and the steps taken by SBI to counter its inefficiencies has made many analysts turn positive on the stock.