Adding muscle to SBI's core strength

SBI is raising equity from institutional investors to bolster its capital base amid a strong cycle, with the ₹25,000 cr Qualified Institutional Placement (QIP) having started on Wednesday. The share sale will be followed by a ₹20,000 cr bond issue, together amounting to ₹45,000 cr and strengthening the country's largest bank.

SBI has seen its market capitalisation more than double since the pandemic, but its capital adequacy has been trailing profits. The equity and bond issues are designed to set that balance right. The bank maintains a higher capital buffer because of its systemic importance, and this round of fundraising will augment it. GoI's stake in the bank will come down slightly but will stay well above a majority holding.

The issue represents a strengthening of the health of PSBs that GoI had to recapitalise during a bad loan crisis a decade ago. But in recent years, state-owned banks have outpaced their private sector rivals in feeding India's post-Covid credit recovery.

Their financial metrics are improving, and they will find the capital markets supportive. Tapping markets is also a good option when the pace of raising deposits trails credit growth. Banks have been lending aggressively to households to feed a consumption boom. Economic and demographic changes are affecting household savings behaviour and diverting a bigger share into equities.

The SBI issue also provides GoI a pathway to trim its holdings in PSBs to desirable levels. GoI has adjusted its divestment priorities from balancing the budget to a more holistic approach incorporating PSU asset value, earnings potential and capacity buildup.

Financial sector disinvestment has proved to be difficult. With banking being in one of its strongest cyclical phases, the SBI issue could be a precursor to capital-raising by other PSBs. They are also being encouraged to scale up subsidiaries in insurance and MFs prior to listing, which supports a gradual approach to divestment that yields higher value.