On 4 October 2011 the credit rating of the State Bank of India was downgraded by the Global ratings firm Moody’s. The ratings agency took SBI's grading to D+ from C-.
SBI had a shortage of capital to cushion bad loans or contingencies and thus started weakening asset quality. High interest rates in a slowing economy results in shorthand for loans that do not yield interest. This led Moody’s to adopt a negative view on SBI’s creditworthiness. As a result, the borrowing companies suffer. Rating downgrades usually are caution signals to bond investors. The Banking customers do not have encounter risk.
After the downgrade, SBI shares slipped 4% to Rs 1,787 on the Bombay Stock Exchange and the Sensex dropped 1.77% or 302 points to 15,685.
As of June 2011, the Capital Adequacy Ratio (CAR) of the SBI stood at 11.6 %. CAR is a measure of the back-up money a bank has to withstand loan uncertainties.
Tier-I capital stood at 7.6 % which was a little below the 8 % desired by the government. Tier-I capital broadly refers to shareholder equity.
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