“If the last financial year was a year of pain, then this financial year will be one of hope and the next will be one of happiness.”
That’s the pronouncement made by State Bank of India chief Rajnish Kumar at a press conference after the country’s biggest lender reported its largest ever quarterly loss of Rs 7,718 crore for the three months ended March 2018.
“We have put the past behind us. We are now much stronger than what we were two years ago,” Kumar told reporters.
This is not the first time the chief of SBI has suggested that the worst is behind the bank. But each time that promise was made, circumstances proved otherwise. First it was stress spreading from known pressure points like the steel and power industries to others like the telecom sector. Then it was the Reserve Bank of India’s decision to push large stressed accounts into insolvency. Most recently, a new stressed assets framework has pushed up bad loans and the need for provisions. That, in fact, was a key reason for the large loss reported by SBI in the fourth quarter.
Kumar hopes that with each of these factors now absorbed by the bank, the next two years will be a slow climb back to normalcy. He’s gone a step further and put numbers to that hope and given guidance on what the bank’s metrics will look like by March 2020.
The first part of the plan is to bring the focus back on growth.
SBI hopes to achieve credit growth of over 12 percent by March 2020, it said in a presentation. In the current financial year, the bank is aiming at growing its loan book by 10 percent, as compared with the 4.9 percent growth as on March 31.
The growth in the loan portfolio and lower reliance on high-cost deposits will push up the bank’s net interest margin to above 3 percent, as compared with 2.67 percent right now. It also hopes to steadily reduce its credit cost and improve its return on asset ratio.
Alongside growth will come an attempt to start improving asset quality indicators.
Over the last three financial years SBI has seen a jump in its non-performing assets as RBI forced banks to recognise stressed assets appropriately and provide for them. SBI’s gross NPA ratio now stands at 10.91 percent and its provision coverage ratio is at 66 percent.
Kumar said that most of the stress has been recognised, but the bank still has about Rs 25,000 crore in loans in its ‘watchlist’ for possible stress. Some of these loans could still turn bad. However, the bank is betting on resolution of large stressed loan accounts via the Insolvency and Bankruptcy Code, which will help bring down bad loan ratios.
By March 2020, SBI estimates that its gross NPA ratio would be below 6 percent, which is closer to the 4.15 percent the bank reported before the bad loan clean-up began reflecting on the bank’s balance sheet in the December 2015 quarter. The net NPA ratio will be brought down to 2.23 percent as compared with 5.73 percent currently, the lender said.
The slippage ratio, which reflects fresh loans turning bad, will likely come down significantly to under 1.3 percent by the end of FY20 from 4.85 percent currently.
Apart from detailing the road map for the bank’s finances, Kumar also detailed a re-organisation plan.
Under this, stressed asset management will be moved to a specialised vertical which will be led by a managing director appointed specially for it. The bank hopes to hire stressed assets specialists for this vertical, who can help turn around troubled loans faster. This unit will take care of resolution as well as recovery of stressed assets for SBI. Presently, a stressed asset management group looks at recovery functions at the bank.
With stressed asset management moving to a specialised unit, the bank’s large and mid-corporate banking groups can focus on growing their portfolio, Kumar said. According to the chairman, SBI will grow rapidly in the next two years since there is plenty of market share up for grabs. Over the last week, the RBI has imposed lending restrictions on two public sector lenders – Dena Bank and Allahabad Bank. Other lenders who are under the RBI’s prompt corrective action are also going slow on lending.
Kumar, however, said that they will not cannibalise on market share held by other public sector banks.
“Other public sector banks are like our family. We will not compete with family but will try and support them in ways we can. We will take the competition with private banks and NBFCs head on,” Kumar told reporters.
The bank is also in the process of revamping its capital markets division. SBI Capital Markets will be made into a pure play investment bank and a partner may be brought in, said Kumar. Ahead of this, the project appraisal division of SBI Caps would be merged with that of the bank.
SBI is also looking to list its general insurance subsidiary after having listed its life insurance arm last year.