State Bank of India to get $1.6 billion bailout after Moody’s downgrade

New Delhi is set to provide a $1.6 billion bailout package to the State Bank of India following a downgrade in the bank's credit rating from Moody's that sent the Mumbai stock exchange into a nosedive, the Times of India reports.

SBI was the darling of the business rags in 2008 when the U.S. banking system was gutted by its own ludicrous mortgage lending system, with many headlines touting Indira Gandhi-style socialized banking as the wave of the future. No longer?

Moody's cut its credit rating for SBI from C- to D+ Tuesday, "citing stress on asset quality and pressure on Tier-I capital" (i.e. higher risk loans and a shortage of reserves).  But India criticized the downgrade as irrational and reflecting a bias against developing economies, TOI said separately.

Officials pointed out that at the end of June 2011, SBI's gross non-performing assets were to the tune of 3.5% of its assets. Net NPAs, which factors in provisions, were 1.6% of assets. "At these levels , Indian banks are much better off than European and American banks. Look at the kind of securities they hold and the quality of those papers," a top official said.

For countries, the story is not much different, the paper said.

"Italy is saddled with debt but is still rated higher than China that is bailing out the so-called superpowers. That says a lot," said a top finance ministry official, accusing agencies such as Moody's and Standard & Poor's , which recently removed the AAA tag from US sovereign rating, of following nontransparent policies.

Warranted or not, however, the downgrade of SBI hit hard on the Mumbai stock exchange. The bellwether Sensex sunk below the psychological barrier at 16,000, with heavyweights like Infosys, Reliance, Tata and Airtel dropping 3-5%.