Random reflections

I am not a big fan of international Rating Agencies, but the recent report of Goldman Sachs analysts shows that they too agree with our concerns about the Indian economy.

They clearly say that the financial sector might be entering a challenging phase as the “Goldilocks period” (strong growth and strong/visible profitability) is widely over in the near term. The rating firm has changed the ratings of SBI from Buy to Neutral, that of ICICI from Buy to Neutral, and of Yes Bank from Neutral to Sell, it upgraded Bajaj Finance from Sell to Neutral and retained HDFC Bank’s rating to Buy.

These ratings tell you if you should sell their share, hold the shares, or buy them now. So Neutral means one can hold the share, but it is less than Buy.

Despite this, the Head of Research India, at the firm, says investors seem to favour the liquidity position of public sector banks over private banks. That’s the strength of public banks. The faith of the people is on public banks led by SBI.

The reasons for the change in ratings are,

  1. Rising pressure on the cost of funds due to structural challenges in the funding environment
  2. Growing concerns about rising consumer leverage prove potential asset quality challenges, particularly in unsecure lending leading to higher credit costs and hence they prefer commercial retail over consumer retail which is expected to grow faster and offers better return profit.
  3. Pressure on operating costs due to elevated wage inflation as well as the need to expand the distribution network for future deposit growth.

We had been repeatedly saying that the Banks have reduced the interest rates drastically so that the loss due to write-offs to corporates can be compensated. Majority of the bank depositors in India are household depositors whose deposits may be small, and who want safety and a regular return from deposits. Now they are shifting to pension funds, insurance, chitfunds, Nidhis etc., where the interest offered is a little more, but the risk is also more.

Hence, it is high time, the banks increase the deposit interest rates.

We have pointed out earlier about the asset quality. After the People’s Commission on Public Sector and Public Services wrote to the RBI, gave public statements, the Former Finance Secretary wrote articles and I wrote about the same in Finance Matters. The RBI increased risk weights and warned the banks and Non- Banking Financial companies.

The RBI needs to scrutinise more. The 43 crore Mudra loans, personal loans, loans without security, corporate loans with very little security and the interest concession given to Corporates. RBI should also take stringent action.

The pressure on operating costs is not due to wage inflation as claimed. It is the responsibility of the government to control inflation. If we analyse the Income Expenditure of SBI, as of March 23, the payments to and provisions for employees came down to Rs. 57291.84 crore from Rs. 57561.99 crore in 2022.  Other operating expenses increased to Rs. 37154.02 crore from Rs.32586.94 crore. So the argument of the agency is wrong. This quarter’s provisions are more, but you can’t rate a huge organisation based on one quarter’s results.

SBI has faced this kind of challenge earlier but ultimately came out with flying colours. The Bank should just move on.

The market capitalisation is a myth. The shares of SBI keep trading below that of HDFC and ICICI but that’s not the true value of SBI. People also know that.

But SBI can surely do things better.

  1. Reduce exposure to Adani and other corporates who are not really doing well but ride on the support of one person.
  2. Increase the staff strength. Here. Let them learn from their competitor, HDFC Bank.
  3. SBI has to keep a watch on its loan write-offs. Between 2017-18 and 2022-23, SBI wrote off Rs.229657 crore and recovery from these accounts is only 21%. Though the annual write off has come down it’s likely to go up from next year. A new cycle will start.
  4. SBI made the mistake of introducing a Career Development System, destroying the team to individual Performance with the complicated matrix given by Boston Consultancy Group. SBI also did not recruit adequate people because of this it is suffering. SBI is a People’s bank, and it should behave as one by recruiting on a massive scale immediately.
  5. SBI should behave as an independent bank as it has done in the past and question the Dept of Financial Services and RBI when their directions are not correct.

The rating Agencies are not neutral. They have their own vested interests. They are always supporting privatization, which will be a disaster for a country with 142 crore people.

But Banks never ignore the findings of Rating Agencies. They act swiftly. SBI being the leader in the industry should show the correct path. The sooner, the better. The performance of banks is the mirror of the economy. When the economy is not doing well, we should accept the facts and act accordingly.


Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.

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