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Ratings agency Moody's Investors Service on Tuesday downgraded the standalone rating for State Bank of India , the country's top lender, citing its "modest" capital and weakening asset quality, sending its shares to a two-year low.

"Our expectations that non-performing assets are likely to continue rising in the near-term - due to higher rates and a slower economy - have caused us to adopt a negative view on SBI's creditworthiness," Beatrice Woo, Moody's Vice President and Senior Credit Officer, said in a statement.

Shares of in the state-controlled bank were down as much as 4.5 per cent after the downgrade to a low of Rs 1,778. At 1.09 pm, shares of the lender, valued at about $24 billion, were off 4.06 per cent at Rs 1,785.95.

Moody's said SBI's Tier-I capital, the core measure of a bank's financial strength, provides an insufficient cushion to support growth and to absorb potentially higher credit costs from worsening asset quality.

SBI's non-performing assets reached a three-year high of 3.52 per cent of loans as of June 30. For the Indian banking system, the ratio was 2.3 per cent as of 31 March 2011, Moody's said.

"Against a backdrop of a slowing economy and higher interest rates, the rising trend evident in SBI's new NPA formation rate since 3QFY11 will continue," the report said.

Moody's expects SBI's potential credit costs to be relatively high in the near term.

The bank posted a 46 per cent drop in June quarter net profit, lagging forcasts due to higher provisions for bad loans. Its March quarter net profit had also plunged on higher provisions. 

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