The chairman of State Bank of India (SBI) expects around $12 billion of non-performing assets to come off the bank’s books as a consequence of state-owned bank reform and believes that across the whole industry there will be a transformative effect.
Rajnish Kumar, speaking with Euromoney at the Asian Development Bank annual meeting in Manila, believes that despite concerns that bankruptcy and resolution rules are stifling rather than streamlining the process of asset resolution, progress is being made.
“It is working,” he says. “The concerns are whether the rules have become too tight and in particular what will be the impact on the SME sector.
“But I think on the whole, the two measures [a revised framework for resolution of distressed assets issued by the Reserve Bank of India (RBI) on February 12 and the launch of the Insolvency Bankruptcy Court] are likely to bring a lot of discipline in the lending and borrowing markets in this country.”
The RBI’s February announcement required that, from March, lenders had 180 days to implement a resolution plan on bad loan accounts of Rs20 billion ($294 million) and above, failing which defaulting borrowers must be referred to insolvency courts. Banks are also required to report defaults weekly to the RBI, even when only a delay of a day in a loan repayment is involved.
“Right now, everyone is fully occupied with addressing the issue of asset quality,” Kumar says. “Of course, the framework brings greater discipline among the borrowers and lenders for sure, but the March quarter is going to put pressure both in terms of elevated NPLs and higher provisioning requirements. The capital position for most banks is under pressure now.”
SBI is different, he says – and it clearly is, by far the biggest of the state lenders and certainly one of the healthiest – “but most of the other public-sector banks are facing an issue on capital adequacy.”
This is despite the fact that the government announced recapitalization bonds last year and issued Rs800 billion of the instruments in March.
Kumar, however, thinks this is short-term pain that should benefit the sector in time.
“I feel that the situation is going to improve for all the banks,” he says. “Retail is a different story, but on the corporate front, which was causing major problems in the last three years, the recognition part is more or less over.
“There is no scope for anyone to have any doubt about what an NPL is now. And this year there will be a definite improvement as far as the fresh accretion of NPLs is concerned.”
At SBI itself, troubled assets are divided into two lists, NCLT 1 and 2 (referring to the National Company Law Tribunal). There are 12 exposures on the first list, 27 in the second, accounting for about $12 billion between them (the last reported figure was Rs783.1 billion in December 2017).
“Depending upon how much recovery we make, that amount is going to go out of the bank’s books for sure,” Kumar says. “Partly it will be written off and partly it will become performing assets.”
Most are expected to be resolved in this financial year, although in practice the assets may not always leave the books completely: they will leave the stressed assets portfolio but could stay on the books as standard assets under new management.
The bank holds provisioning of 65% against the list 1 and 2 exposures, as at March 31 2018. Kumar expects average recoveries to be between 35% and 40%.
“On a net basis this year, there will be a reduction in both gross and net NPLs,” he says.
The whole point of state-banked reform is that state banks are not lending because they are so stymied by their bad debts and their provisioning requirements against those debts for capital adequacy. So, when all of this is done – the recap bonds digested, the insolvency court active and the assets written off or resolved – will this be enough?
“Lending, of course, is the psychological factor,” Kumar says. “Having gone through such a painful period for two, three years, it will take a little bit of time for lenders to get their act together.
“It’s not that lending is not happening. But all banks are now focusing on retail. Underwriting norms will be tighter in corporate lending, and some public-sector banks will not be able to take that exposure.”
Kumar sees this as an opportunity for SBI in a less crowded space, but, from the government and RBI’s perspective, the point was surely to see everyone lending again.
The whole process of public-bank reform was shocked earlier this year by fraud at the Punjab National Bank. For Kumar, the incident showed that credit-risk management is all well and good, but it needs to come hand in hand with operational risk management.
“It came as a surprise to the banking industry, both the size of the fraud and the period,” he says.
He believes SBI’s systems are more robust.
“There is always scope for improvement. You never claim you have reached 100% fool proof: any banking CEO who makes such a claim is inviting danger for himself. But our internal audit systems are fairly robust and strong.”
In the wake of the fraud, the RBI called for greater powers of oversight over public-sector banks. Kumar is careful what he says about his regulator – “whatever your ownership is, you have to follow the rules and regulations” – but does draw a distinction between regulation and professionalism.
“Regulation is one thing: this is the law and you follow the law,” he says. “But when it comes to the quality of management, professionalism and governance, I think that responsibility is more on the government.”
The sector clearly needs mergers. But SBI, which is digesting the merger of five associate banks and one small lender, is certainly not going to lead that charge.
“Merging six banks,” says Kumar, “is not easy.”