Concerned over the deteriorating asset quality, Moody's Tuesday downgraded credit rating of State Bank of India by one notch to 'D+', a development that pulled down its shares to a 2-year low at Rs 1,786.70 on the BSE.
The ratings downgrade puts pressure on the government to infuse capital in the country's largest lender as soon as possible.
"Notwithstanding our expectations that SBI's capital ratios will soon be restored through a capital infusion by the government, SBI's efforts to secure this capital for the better part of the year demonstrates the bank's limited ability to manage its capital," Woo said.
Following the rating action, SBI shares plunged nearly six percent in the intra-day trade on the BSE. It later recovered a bit to close at 2-year low at Rs 1,786.70, down 4.08 percent.
"SBI's downgrade impacted the investors' sentiment as the market declined after the news. The downgrade had wide impact on the financial stocks," Motilal Oswal Securities Associate VP Analyst Technical Equities Parag Doctor said.
SBI had reported a Tier-I capital ratio of 7.60 percent as of June 30, 2011, as against the suggested level of 8 percent termed as desirable by the government for public sector banks.
"The level pushes the bank into a lower rating band. In addition, it was below the 8 percent Tier-I ratio that the government of India has committed to maintaining in public sector banks and substantially lower than those of other C-rated Indian banks," the ratings agency said.
It said such a low Tier-I capital ratio provides an insufficient cushion to support growth and to absorb potentially higher credit costs arising from deteriorating asset quality.