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Bad loan concerns have been proven to be overblown: SBI


Concerns of a rise in bad loans have been proven to be overblown as large companies are better placed and banks are increasingly using analytics to prevent non-performing assets, said
Swaminathan Janakiraman, managing director of risk, compliance and stressed asset resolution group, State Bank of India (SBI). The new government-backed bad bank will ensure quick resolution of large accounts through consolidation of bad loans, Swaminathan tells
MC Govardhana Rangan and
Joel Rebello. Edited excerpts:

What is the outlook on stressed assets?

There is no need to be pessimistic. But at the same time, we do not want to be very optimistic. Slippage ratios have held on well despite two years of Covid. Both high frequency data and feelers on the ground look quite positive. Highcontact industries and unorganised sectors, which are the most impacted by Covid, do not have too much bank exposure. Secondly, the way some sectors have bounced back gives us confidence that things will be okay. There will be slippages but not like we saw in the 2015 to 2018 cycle. Both corporate and bank balance sheets are in better shape.

The convergence between the government, the regulator and lending institutions has helped address problems upfront rather than postponing them. Today, we do not need physical monitoring because we have data points like GST and tax returns.

How do you use this data? What are the potential red flags?

One critical assessment has been the RBI’s Crilic database, with information about all credit above Rs 5 crore. If a particular account has slipped into the SMA category elsewhere, it comes to my knowledge on a weekly basis. We did not have a comparable tool 10 years ago and used to rely on information exchange between the banks, which never used to be adequate.

Our early warning system (EWS) tracks almost 200 different parameters on what is happening in our account, 40 of which come from Crilic. It also tracks nonfinancial parameters like changes in boards or even exchange filings. We also started the credit review department in 2018 which is completely independent. Then there is also a post-sanction monitoring driven centrally now because we cannot leave it to the same relationship manager. We now plan to replicate this to our regional and local head offices. As a trial we have run it centrally on Rs 50 crore and more accounts. From April, we will decentralise this and put this in every regional office for Rs 5 crore and above accounts.

The nature of banking stress has changed — to retail and SMEs from corporates. How will you deal with this change?

The bulk of the hit post-Covid has been felt by MSMEs and they are the most vulnerable because they do not have the deep pockets or markets or connections a large corporate enjoys. In retail, banks did not have exposure to the unorganised sector and have been mostly lending to the salaried class. A bulk of SBI’s salary customers, for example, are from state or central government or public sector entities or large corporates; so that way not much stress is seen in our books. But I am sure in the market, people could have seen it with other type of institutions. That way, the stress today is spread wider than in the past. In aggregation, these amounts may also not be big, which means it is easier for us to address or remediate this stress. The NPA plus stressed book of the MSME sector has been generally between 6% and 8%, and these two books are showing a similar trend. As of now, what we see is not out of the ordinary. Retail has been excellent with NPAs less than 1%. The collection efficiency has bounced back to normalcy after taking a hit in February.

When the pandemic broke out, some rating agencies had expected the total banking slippages at Rs 8 lakh crore but our chairman at that time said his estimate was not in excess of Rs 2 lakh crore. We were confident that mitigations will be put in place to deal with the disaster. The actual slippages were not even Rs 2 lakh crore because we have been constantly monitoring these accounts driven by data.

How is the current restructuring different from what was done in the previous CDR regime?

Before 2015, multiple efforts were made by the regulator and banks because of the huge corporate debt pile. The efforts were to save an account to try and revive the company. It gave the promoter multiple chances to get back to normalcy.

Post 2015, we learnt our lessons on what to do to deal with corporate stress. The IBC process brought an orderly resolution to corporate stress. A part of the stress got absorbed in the IBC process and was not part of the restructuring book, and in the remaining accounts where restructuring is being done today, the whole approach is on the basis of viability. Today, any restructuring process has to be vetted by a rating agency and a minimum RP4 rating has to be assigned before a lending institution can take up restructuring.

The IBC timeline has been delayed.
How do you see it?

We have three stakeholders – the borrowers, lenders and judiciary. Each of these is serious about adhering to the timeline. But capacity build-up also has to take place. Today there are litigations in all courts, overloading the system. IBC as a legislation is hardly five years old, of which we had two years of Covid forbearance. I think it is too early to pass a judgement on its efficiency. Borrowers now know that running a business is not abirth-right; so they try to challenge in as many forums as possible. There are challenges right from admission to when the resolution plan is approved. A piece of legislation cannot envisage a timeline for all this. But as a lender we are worried about the delays because it leads to significant value destruction. But as a lender I am happy that resolutions are happening in time.

Is there a fear it will turn another DRT?

Firmly no, because the entire structure of aresolution professional and CoC is very unique to IBC. In DRT, as a lender I file the case and a presiding officer hears it, which is very similar to a civil court. The DRT brought a recovery officer setup, which was added attraction as compared to a civil or a commercial court. IBC is a more refined version where you have a resolution professional and a CoC; so decision making becomes faster. The facilitation that the RP becomes the CEO of the company and the CoC is like the board means that the borrower is no longer running the company. In DRT it is debtor in possession whereas in IBC it is creditor in possession except in SME prepack. Because of these two differences, IBC is much superior to DRT. IBC’s approach is resolution, recovery is incidental.

Enforcement of personal guarantees is also a new aspect of IBC. What is your view?

This is an additional tool. It is still evolving and outcomes will take time because it will still come to the NCLT. Again this can come into focus if there is an augmentation of capacity or exclusive NCLTs are set up to deal with original company law matters. A guarantee is an intangible security. The amount you can recover through a personal guarantee is not something you can estimate in advance. It has to be tested on the ground when you invoke it. I think we should not be betting a lot on personal insolvencies for the simple reason that corporate debts are in thousands of crores and when you enforce a personal guarantee, there is no way that you can recover any comparable number.

After all the restructuring and IBC, we have gone back to a National ARC. What is this going to achieve?

None of the existing ARCs have adequate capital to take on the stress book of the banking system. We need an ARC of scale that can come only if there is adequate capital. This institution will be owned by banks that will have no difficulty in providing capital. It will acquire large assets which is why the cut off was Rs 500 crore and above exposure to the banking system. Because of the government mandate NARCL will be able to acquire 100% exposure to the banking system. It gives them the ability to resolve the asset with complete freedom. The third advantage is that the SRs will be guaranteed by the government on face value if resolved within five years.



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