State Bank of India’s roadmap to the Basel III deadline

India’s banks are under pressure for two reasons. The Reserve Bank of India (RBI), the country's central bank, is forcing lenders to acknowledge the full extent of their non-performing assets (NPA); and the banks will need to meet International Financial Reporting Standards (IFRS) and Basel III capital requirements by March 2019. 

Public sector banks, which tend to have the highest NPA ratios and the lowest capitalisations in the industry, are struggling. But as chairman of State Bank of India (SBI) – the largest Indian lender by total assets and Tier 1 capital – Arundhati Bhattacharya is in a strong position.

Reforms welcomed 

Ms Bhattacharya has welcomed the RBI’s banking sector reforms and believes they will continue despite the premature departure of former governor Raghuram Rajan, who is largely seen as the father of the industry’s makeover. She also says the government’s decision to extend her mandate, to ensure SBI finalises the merger with its five associate banks, proves the state is serious about strengthening the banking industry. 

Today, SBI’s capitalisation does fall short of Basel III requirements (the deficit remains undisclosed), but Ms Bhattacharya is not worried about meeting the 2019 deadline. “We are confident we will be comfortable and that we have sufficient ways to [meet these requirements]. We have a plan A, B and C. Also, we do expect the government to continue supporting [banks],” she says. 

In 2016, SBI received the largest capital infusion (Rs75.75bn, or $1.13bn) out of the 13 banks targeted by the state. 

SBI’s own efforts to raise capital include selling Rs30bn in non-core assets by the end of 2016, including stakes in credit rating agencies, credit bureaus and the national stock exchange. Selling non-core assets had generated about Rs10bn in the year to November. 

International coco debut 

To boost capitalisation further, SBI printed a $300m contingent convertible note, or coco – a bond that converts into equity if a pre-determined trigger event occurs – in September. The bond added additional Tier 1 capital. The bank had no capital buffer before this transaction. 

SBI also stood out as the first Indian lender to price a coco bond in the global capital markets. “There was good interest in the local market but we chose to tap international markets because we thought international investors needed to see us print these kinds of instruments,” says Ms Bhattacharya. 

Some analysts contested the deal because it fell $200m short of the initially desired volume. But to Ms Bhattacharya, deal size was not the priority. “If we had raised the price, we could have got more. But size was secondary to getting a good price. This bond was not something we desperately needed, but we believed in going to market when there was a good time to do so,” she says. 

Ms Bhattacharya points to the bond structure having two triggers rather than the usual single trigger to explain the size shortfall. “Understanding the instrument was a little difficult. We went back to [the RBI] saying the structure of these bonds needs to be simplified and brought in line with international standards. We have made a number of suggestions to the RBI,” she says. 

SBI will not print other coco bonds in international markets until the RBI simplifies the instrument’s structure, she adds. 

Rate drop 

While the 2019 Basel III deadline looms large, Indian lenders have found respite in the RBI dropping the repo rate by 25 basis points to 6.25% in October. Ms Bhattacharya, who was calling for monetary easing earlier this year, was enthusiastic about the cut. “Of course it made sense. The RBI says it is data driven, and the inflation trajectory certainly made the case for a rate cut… Liquidity is [also] good, which enables transmission in the system,” she says. 

Ms Bhattacharya was recommending a larger 50 basis point rate cut because she believes India’s inflation will drop in the next two months. But knowing the RBI is very conservative, this cut was acceptable, she says. 

Beyond India’s borders, growing inward-looking political and economic policies worry Ms Bhattacharya. “For an emerging market, it is a little worrisome. We feel that at the end of the day, globalisation is the answer. It is important that people work together… You cannot have cases where something is good for you and bad for everybody else. You have to work on win-win principles if you are going to control things like climate change or cyber security – it needs global co-operation,” she says.