With banks empowered after the Insolvency and Bankruptcy Code (IBC), there’s consciousness about “the need to pay on time” and the “days of over leveraging” are over, says RAJNISH KUMAR, Chairman, State Bank of India, the largest bank in the country in terms of assets and with over 20 per cent of the market share. “Now there’s a discipline and threat. It’s a combination of IBC as well as the RBI framework for stressed assets. Everybody is adjusting to the new reality,” Kumar told GEORGE MATHEW and SHAJI VIKRAMAN. Excerpts:
One of the significant changes over the past year has been the enactment of the insolvency law. How much of a behavioural change has it brought on the part of both promoters and banks?
There’s greater realisation now. One is about the borrowing itself. I think the days of over leveraging and thin equity are over. Lenders are also conscious about the equity of the promoters — both in terms of size as well as visibility. The need to pay in time — that consciousness is also there. Now there is a discipline and threat. It’s a combination of IBC as well as the RBI framework for stressed assets. Everybody is adjusting to the new reality. Ultimately, it is beneficial for the credit market of the country. Now careful planning is required for cash flows. Lenders and borrowers will have to be very disciplined and cautious over the fact that there’s no over leveraging.
A new ordinance to amend the insolvency law has just been issued. What corrections were needed?
The timelines can be shorter. The original intent was that you do it in 180 days or at best 270 days. Because it’s a new law and there are a lot of litigation, we could not adhere to 270 days in all the cases. What is the way out other than this? This is the only way out. I’m sure the amendments will take care of many concerns which led to litigation. There will be much more clarity about the process and timelines. There is some relief for the MSME sector. The sanctity of timelines needs to be enforced.
In the new insolvency law era and in the context of the challenge of bad loans, how has SBI responded?
We have done a lot of changes – at the policy and organisation levels. The structure which handles our corporate banking is undergoing a complete revamp. The process of sanction and the role of business vertical heads and the role of the risk department in sanctions have undergone a change. In terms of project funding, we are asking for higher equity in projects. Ideally it should not exceed 1:2. Earlier, it was 1:4 or 1:3. If a Maharatna or Navaratna company or a AAA or AA rated borrower is putting up a project, we can relax. We are not taking any chances about approvals. All approvals from government departments will have to be in place. That will be a pre-disbursement condition. Because once the project gets delayed, then the entire economics of the project gets changed and all our assumptions go for a six. We are looking for good projects. We have given commitments to many good projects. We are working on financial closure of a couple of projects. We are strengthening the project finance department quite a bit.
You have said that the worst is over on bad loans. Do you anticipate more slippages of bad loans in the coming quarters?
I don’t think so. We have given guidance and we will adhere to that. Most of the recognition had already happened last year. We have also issued a watchlist — which is Rs 25,000 crore. In the case of SBI, I have said slippages won’t be more than 2 per cent unlike last year when it was very high. You will see NPAs starting to come down.
How long will the banking sector have to endure this pain?
There are 21 public sector banks. It will differ from bank to bank. What were their operating incomes? That’s a critical factor. Is their operating income growing? How much control are they exercising over their overheads and expenses? What’s their decision-making process so that they don’t commit the mistakes that banks committed in the past. They have to have a sound business model. What I understand is that nine PCA banks have given their revival plans to the government. Other banks also have a plan. Some banks may come out very quickly and some banks in two years. They don’t have more time than that. Either you come out this year or next year. The NPA cycle has peaked.
What’s your assessment on the current recovery? Do you thing growth is back on track?
Credit growth has now exceeded 10 per cent. GDP numbers are also there. The RBI also sounded positive as far as growth is concerned. Consumption story is intact. We have seen pick-up in housing activity also. Credit offtake is still largely retail but on a year-on-year basis there has been pickup in a corporate credit also. Growth in retail and personal loans is much faster even now.
There are hardly any new project investment announcements. How do you see corporate credit growth this year?
There are a couple of projects. The road sector has moved to EPC (engineering, procurement and construction). When BOT (build–operate–transfer) was there, the capital requirement was more… in this, the government funding was to the extent of 40 per cent, and in EPC, the government has to find the money and pay them. That’s why in the road sector we don’t see any major increase in credit. Once the parcels get auctioned, there will be credit demand. Steel is definitely seeing a revival. Cement has seen a revival. Housing has seen a revival. Renewable energy projects are also coming.
Banks are still weighed down because of their exposure to the power and telecom sectors. How are lenders coping?
Two telecom accounts have become NPAs. The remaining ones are big players. I don’t think these three (big players) will have a problem in servicing their debt. Other than that, I don’t think there’s anyone else in the telecom sector. In the power sector, most of the accounts which were stressed have been recognised as NPAs in the last two quarters by banks. We don’t want to sell them cheap.
Is there a case for consolidation in the banking sector now? Is SBI being sounded out for a merger or acquisition of some of the troubled banks?
SBI has already become big. My view is that from a systemic risk point of view, it won’t be advisable that SBI grows through merger or acquisition. Our normal growth and maintaining of market share is a different matter. You can’t have a banking institution which already has over 20 per cent market share (to go for more mergers) … from the risk management perspective also, it’s not good.
Do you support the idea of merger of PSU banks?
The issue which definitely needs deliberation is that whether we need 21 public sector banks.
Have you sought relaxation in NPA norms, especially the RBI circular on scrapping recast schemes and implementing the one-day default norms?
We (SBI) have not asked for relaxation. We have asked for certain clarifications. Some suggestions were given particularly in the context of the February circular of the RBI. The spirit of that circular is alright.
Banks are now carrying out forensic audit of bad loan accounts above Rs 50 crore. Have you noticed any rampant fund diversion by promoters?
We can’t make a generalised statement. There is a process of forensic audit in any account of Rs 50 crore and above, which has become an NPA. The intention of forensic audit is to determine whether there is fund diversion or not. The audit process is on.
There’s an ongoing debate on private versus public sector banks, and also on governance standards. How do you view this?
The law applies to all the banks equally. All are listed on the exchanges. If it’s RBI regulations, it applies to all – private and public both. It is the organisation’s DNA and corporate governance structure, where my view is that it should be ownership neutral. Many things are a matter of perception. We are also government owned. But it is also the perception of the market. The market believes it (SBI) is an organisation with strong ethics and a strong value system. Within the public sector space, you can have that.
Do you expect more rate hikes this year?
I don’t think so. They are done for this year. The policy stance is also neutral. They (RBI) may not increase it in August or later this year unless the macro-economic scenario changes. Crude prices also seem to be stabilising.
There has been much discussion on ethics and integrity in the banking sector in the context of recent cases of fraud in some banks. How do you view this issue?
It is very important. Accountability has to be there. Also, there should not be any witch hunting. However, if I do anything wrong and then expect that because I am from a bank, action should not be taken… that we can’t expect. At the same time, in commercial judgments which have been taken in good faith, people will have to be protected. When people are taking decisions and they take the decisions in certain context and circumstances, and if decisions are bona fide – they may turn out to be right or wrong – they should be protection for all bona fide decisions.