The Hindu Business Line : Decks cleared for SBI to get bigger

Chennai, Nov.30 State Bank of India getting Cabinet approval for raising Rs 16,000 crore signals the decks being cleared for the country’s top bank to get bigger. Its closest competitor, ICICI Bank, raised a whopping Rs 20,000 crore of funds earlier this year. Other private banks have also announced intentions to raise proportionately higher amounts of money.

What are these banks raising money for? It is a combination of reasons for different banks and in some cases, it is also all of them.

Principally, they are raising money to help them lend more. The economy has been growing at close to 9 per cent for the last four years and loans have been growing at 30 per cent during this period. During the first quarter, there was a slowdown to about 24 per cent - but that is on a huge base. And the busy season has just begun.

Second, even as banks grow rapidly here, they are also looking at overseas markets as many Indian companies go there. A number of Indian banks have established outposts in China, the Gulf, South-East Asia, UK, Canada and Africa to meet the demand posed by a new wave of Indian companies going to these places.

Earlier, the overseas forays were largely driven by a need to capture the business of local NRI population.

Third, Basel-II, the revised version of global capital adequacy standards that comes into effect from April 2008 for banks with international presence and a year later for others, imposes higher capital requirements.

Many banks say that their internal estimates show that if the standards are currently applied, their capital adequacy may be down by a percentage point or two.

So building a higher capital base is a case of preparing for the possibility of a higher charge on capital that may be applied in a couple of months.

Fourth, the banking sector is expected to be opened up a little more in a little over a year from now (April 2009). The RBI has said it will review the second phase of opening up at that time. Although there is a possibility that banks may get some more time, if they have not gained sufficient strength, one can’t count too much on it.

Raising funds (when they can be tapped now) and building scale will help combat the competition that is expected from foreign banks then.

Fifth, capital provides a cushion for the possibility of some of the earlier loans going bad.

There have been reports of some slight rise in home loan defaults. Besides, there is also a new accounting standard for pension that banks have to get ready for and which will require more funds.

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