Moody's Investor Services has downgraded the financial strength rating (BFSR) of the State Bank of India (SBI), the country's largest lender, to `D+' from `C-' on concerns over its deriorating capital base and rising bad loans or non-performing assets (NPAs).

SBI also reported a 46-per cent fall in its net profits at Rs1,584 crore for the fiscal first quarter ended 30 June 2011, against a net profit of Rs2,914 crore in the first quarter of the previous financial year.

The sharp fall comes against a 32-per cent increase in SBI's net interest income (NII) to Rs9,700 crore (Rs7,304 crore) and an 18 per cent increase in operating profit at Rs7,242 crore (Rs6,134 crore).

SBI's net interest margin (NIM) stood at 3.62 per cent, against 3.18 per cent in the previous year quarter.

SBI's profit has been dented by higher provisioning for non-performing assets (NPAs) and depreciation on investments.

The revised rating pushes the bank's baseline credit assessment (BCA) to Baa3.

Moody's said the non-performing assets (NPA) of SBI are likely to continue rising in the near term as higher interest rates and a slower economy clash.

SBI reported a Tier 1 capital ratio of 7.60 per cent, below the stipulated 8.0 per cent under Basel-II  norms, as of 30 June 2011.

At this low level, the capital might not provide a sufficient cushion to support growth and to absorb potentially higher credit costs from its deteriorating asset quality, Moody's said.

"The rating action considers SBI's capital situation and deteriorating asset quality. Our expectations that non-performing assets (NPA) are likely to continue rising in the near term - due to higher interest rates and a slower economy - have caused us to adopt a negative view on SBI's creditworthiness," says Ms Beatrice Woo, vice president and senior credit officer at Moody's.

"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," said Woo.

"And, given that a bank's ability to freely access the capital markets is an important rating criterion globally, we, therefore, believe a lower BFSR for SBI is warranted, especially as these circumstances are likely to recur," Woo added.

The rating downgrade comes at a time when SBI is seeking to raise as much as Rs23,000 crore through a rights issue that would raise its Tier 1 capital ratio to around 9.30 per cent.

Moody's however, says even with the additional capital, assuming a loan growth of 15 per cent over the next few fiscal years, SBI's capital ratio would still come below 8 per cent levels, which would again necessitate fresh capital infusion.

Shares of the State Bank of India plunged over 4 per cent to touch a 2-year low of Rs1,751.35 on the BSE. At 02:00 pm, the company's shares were trading 4.8 per cent lower at Rs1,773.