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    Apr 2011

    Default State Bank of India needs to raise further funds

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    State Bank of India, the country's biggest lender, will need to raise funds beyond the $1.6 billion assured by the government on Monday to meet rising demand for *****, a top bank official told Reuters.

    Many of India's state-run banks, which account for 70 percent of lending in Asia's third-biggest economy, need to raise capital to strengthen balance sheets eroded by fast loan growth and worsening asset quality as economic growth slows.

    Many banks had hoped to hit public equity markets to raise capital but a plunge in Indian stocks last year made that impossible, putting pressure on the deficit-strapped government to step in. New Delhi has said it is likely to infuse up to 160 billion rupees into state banks to shore up tier-I capital adequacy ratios to the government's targeted 8 percent.

    The government will inject 79 billion rupees into SBI by buying shares through a preferential allotment, the lender said on Monday.

    The investment will likely raise the government's holding by 2-2.25 percentage points from 59 percent now, chief financial officer Diwakar Gupta said on Tuesday.

    However, the bank needs 150 billion rupees, including retained profit, a year in order to meet loan demand, he said.

    "We will definitely need to raise money in the next financial year. We will have to see if the government is putting more money," he told Reuters by telephone.

    The next financial year begins on April 1.

    The state lender is estimated to post net profit of 109.8 billion rupees in the year-ending March. It had net profit of 106.9 billion rupees in the previous year.

    Several government-run banks, struggling with slowing but still-rapid loan growth and the threat of delinquencies as borrowers in the infrastructure, property and airline industries struggle, face a challenge to raise capital as interest rates remain high and markets are choppy.

    Bank lending in India is expected to grow about 16 percent in the year that ends in March, slower than the 21 percent growth clocked in the previous fiscal year.

    G. Chokkalingam, chief investment officer at Centrum Wealth Managers, said ***** at state banks are growing faster than retained profits, driving the need to raise capital.

    State lenders, meanwhile, tend to see asset quality deteriorate more than their private sector rivals during economic downturns.

    Bad ***** in India may jump to as much as 5.8 percent of the total within two years in a "severe risk" scenario, from 2.8 percent in September, according to a central bank report. The ratio is expected to climb to 3.2 percent to 3.5 percent by March 2013 under a baseline scenario.

    The non-performing loan (NPL) ratio for Indian banks was 2.3 percent in the last fiscal year.

    "State banks have a social objective and there is a bit of inefficiency as well. Not to say that they are doomed but I am not very optimistic," said Chokkalingam, who has 10-15 percent of his portfolio in banks but does not own SBI shares.

    No. 2 state lender Punjab National Bank on Monday approved raising 12.85 billion rupees through a preferential share issue to the government.

    Other state-run lenders, including Bank of Baroda, Indian Overseas Bank and Union Bank of India are also lined up for capital infusion.



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