CRISIL Ratings' update: STATE BANK OF INDIA

28 March 2006

CRISIL notes that some investors have not received principal and interest payments on State Bank of India (SBI)'s Tier II bonds due on April 1, 2006. Although cheques for these payments have been received by investors within the due date, some investors have not been able to encash the same on account of bank holidays on April 1 and April 2, and the subsequent strike by SBI employees from April 3. The strike has affected SBI's normal banking operations, and the above mentioned cheques presented for realisation have therefore not been cleared.

CRISIL's interactions with SBI have revealed that SBI had taken measures to keep its branches open on the first two days of April. However, since other banks were not working on those days, some investors were unable to present their cheques for realization on these dates. Such cheques are yet to be cleared, and the corresponding principal and interest payments have therefore not been credited.

CRISIL believes that this delay does not reflect financial inability or unwillingness to pay on SBI's part. In CRISIL's opinion, the current scenario is akin to a force majeure event and hence does not indicate any change in the inherent credit quality of SBI.

CRISIL's ratings on the debt instruments of SBI ('AAA/Stable' on Tier II Bonds and 'P1+' on certificate of deposits) continue to reflect the bank's dominant position in the Indian banking sector, with a share of around 20 per cent of total banking sector deposits. SBI's dominance is reinforced by the integration of its associate banks and subsidiaries with itself. This makes the bank extremely important for India's economy and financial system. SBI's strong franchise gives it access to a steady source of stable retail funds, which constituted around 59 per cent of the bank's total resources as on March 31, 2005.

SBI's return on assets (Profit after Tax/Average Assets) has been consistent at around 1 per cent over the past 3 years. SBI is adequately capitalised, with a Tier I capital adequacy ratio of 8.04 per cent and a large capital base of Rs. 240.72 billion as at March 31, 2005. The bank has considerably improved its net worth coverage for net non-performing assets (NPAs), the same being at 4.4 times as at March 31, 2005, due to reduced slippages reflecting improving asset quality across the banking sector. However, the bank continues to have a high level of gross NPAs at 5.95 per cent of gross advances as at March 31, 2005, compared with an aggregate figure of 5.2 per cent for all scheduled commercial banks in India.