PSU Banks Shouldn’t Chase High Growth Yet As Clean-up Is Still On, Says SBI Chief Rajnish Kumar
Kumar cautioned that banks should not jump into a trap where they want to show progress and earnings.
Public sector banks should be cautious about chasing growth even as balance sheets are improving, according to State Bank of India Chairman Rajnish Kumar.
Most public sector banks took the last one year to repair their books and may take two quarters of 2019-20, Kumar told BloombergQuint in an interview. “The focus is still of building the balance sheet. For anyone expecting that there will be huge earnings jump, that expectation for any bank should not be there.”
Kumar cautioned that banks should not jump into a trap where they want to show progress and earnings. “First, we build the balance sheet and then profit is bound to follow,” he said. “Even at current levels, there can be good profit. That approach will continue.”
He expects credit growth of India’s largest lender to pick up in the second half of the ongoing fiscal. It grew 13 percent year-on-year but fell year-to-date, he said. “So, YoY is a good indicator that the credit growth picked up in the second half of last year very significantly, and same will happen this year too.”
Credit growth of Indian banks had slowed because of mounting bad loans after the Reserve Bank of India’s asset quality review of 2015. But bad loans fell in 2018-19. Gross non-performing assets of public sector banks declined from their peak of Rs 8.77 lakh crore in March 2018 to Rs 8.06 lakh crore as of March 2019. The net non-performing assets of state-run banks also declined at a faster pace due to increased provisioning.
“We are going through that pain and I hope that in future we will have a road which is much smoother and not with potholes,” Kumar said, referring to bad loan cleanup at banks.
With the clean-up nearing completion, ICRA Ltd. forecasts state-owned lenders to regain profitability in FY20. The rating agency expects gross and net bad loans to decline to 8.1-8.4 percent and 3.5-3.6 percent, respectively, by March 2020.
This came after the government injected Rs 3.12 lakh into public sector banks in the last four years, pushing their coverage ratio close to or above 70 percent. Moreover, according to a government statement, state-run lenders recovered Rs 3.59 lakh crore during the period, including a record recovery of Rs 1.23 lakh crore in 2018-19.
In fact, Kumar expects higher recoveries from bad loan accounts to improve SBI’s performance in the second half of this fiscal.
Is SBI looking to raise funds anticipating growth? Kumar said he would wait for September quarter. “There are a lot of things which may happen in this quarter in terms of recoveries and certain other plans. So, we are in no hurry.”
Watch the full interview here:
Here are the edited excerpts of the interview:
What is the sense you are getting at a time everybody was penciling in that the current financial year will be the year of growth? With the balance sheets of PSU banks being repaired and the earnings from corporate India coming up, there seems to be a global cloud in the horizon. Do you think it will get repaired sooner rather than later or is it difficult to say right now?
Right now, it is difficult. But there is a lot of work in progress. Even if we look at budget, there are many announcements in the finance minister’s speech. Once they get executed, which is expected to within this year, it will give boost to the demand.
First, we need demand boost in the country. As of now, the demand has slowed down and that we are seeing in many sectors. The sectors which are under focus will be related to construction, whether it is infrastructure or affordable housing. That is the sector which capable of creating employment and benefiting related interest—the forward and backward linkages for infrastructure, housing is very significant. Last year, we were taking pride with the fact that consumption credit or growth is intact. However, at present, there is a slowdown in certain sectors like auto. It is important that demand comes back in system as quickly as possible.
As far as PSU banks are concerned, because of recapitalisation, which was done in a significant way, many banks have come out of prompt corrective action framework. Only five PSU banks are within the PCA framework. The announcement of recapitalisation of Rs 70,000 crore is significant. The supply side constraint, which has come through PSU banks and the inability to lend for various reasons will go away. We need demand and we need the capability to meet that demand.
If the Rs 70,000-crore is for two to three years, then it is not as impressive. Right?
I don’t think there is convention for second or third year too in the budget. Rs 70,000 crore is for the year.
At least three months ago, a lot of people were believing that the slowdown in consumption is due to the lack of liquidity in the system. Do you think if liquidity issues get resolved and PSU banks play big way, do you think the slowdown gets resolved?
The RBI announced measures for the liquidity support to NBFCs immediately after the budget. You have to take a holistic view. It is the banks and within banks, private and public sector, and there are NBFCs, which are/were efficiently providing last-mile connectivity or lending to those sectors where PSU banks were unable to reach or for some reason and were unable to deliver those loans. Therefore, the entire sector survival of NBFC and public sector banks is very crucial as far as supply of credit is concerned.
What part of Rs 70,000 crore will become growth capital? A lot of repair work has been done for number of public sector banks but there is still some stress coming up. How much of that will end up being growth capital which is what the system needs for banks to lend more? Second, the government had announced a partial credit guarantee scheme. How will that work? By the looks of structure of six-month time, it doesn’t look like lot of medium or small public sector banks can make use of it.
Even we are waiting for the details of partial credit enhancement and only when the details come, we will know. I am also not clear of the six-month time frame. I’m not sure if it means that the loan was default within the six months. So, let us wait for details.
Your retail assets won’t show that bigger default rate.
Right. In any case, where we purchase the pool, normally the default doesn’t go beyond 1-1.5 percent. The support is available to sound NBFCs. Through the portfolio purchase, liquidity can go through some NBFCs if they get constrained. As per our existing policy and the RBI’s framework for purchase of pooled asset, banks can still do it without the partial credit enhancement because we are ensuring that the pool quality is good, which whether guaranteed or not guaranteed must be the case. Because, purchasing of pool where there are doubts of recovery, in either situation banks would not do and will not do. There can be debates on originators rating, that originator is also ‘AA’ or ‘AAA’. When we say sound NBFC, there can be A-rated NBFC, too.
How do you define it?
The pool rating, whether guaranteed or not guaranteed, guarantee is an additional comfort and encouragement. But when we avail or take credit enhancement too in terms of due diligence, and quality of asset, there cannot be a compromise. We must see the guidelines for originator ratings. Even if the original rating is A or the estimates of default given on pool are within the tolerance limit, then that should be allowed to be done. But otherwise, even if certain things or pool purchase which cannot be covered or our existing process and due diligence process is concerned, it will continue in any case.
There is still gap between the amount of money NBFC sector needs and how much rest of the banking industry is buying. Do you think that is likely to change?
Wherever there is a little bit of disruption, which happened after IL&FS crisis, it will take time for confidence to come back. But even today, there are no lack of funds as far as the sound NBFCs are concerned. For anyone who is stressed, NCLT level resolution will happen.
Will some of the money which is used to channel PSU banks will be used for growth capital? The hope was with the write-backs the bottom line will look strong, but loan growth will come back. The slowing economy seems to suggest that loan growth will not come and therefore, the valuation uptick, which people were hoping for, which well-deserved PSU banks might get, will not come in hurry. How would you picture it?
For most public sector banks, the last one year was a repair part. It may increase by another two quarters. The focus is still on building the balance sheet. Right now, immediately, we should not jump into a trap where we want to show better progress and earnings. Focus should remain on what the path of public sector banks and SBI is doing. First, we build the balance sheet and then the profit is bound to follow. Even at current levels, there can be good profit which can be generated. That will be the approach which will continue.
Demand generally picks up in second half and every year that happens. Even if you look at our book, the credit growth on a yearly basis is 13 percent at present. But if I look at the growth so far this year, the negative growth is bit higher than what is was last. So, year-on-year is a good indicator that the credit growth picked up in the second half of last year very significantly and same will happen this year too.
Do you reckon that people should not expect at least in first two quarters from space at large and SBI too?
People should not expect there will be huge earnings jump in any banks. As far as balance sheet strength is concerned, if you are watching it then you can expect an improvement.
When we were talking to NBFCs, we were making that point that why is it that NBFCs are so worried about what is happening. In the last few years, they were taking market share away from PSU banks because there where easy rules and now they are under pressure that PSU banks will take that share. Is that share taken up from stronger PSU banks and SBI? Or is the meat on the table taken by stronger private sector banks?
We have to wait for June-quarter numbers. As far as retail is concerned, it is about the reach and capability to deliver. The banks which have those capabilities, whether it is public or private sector banks, will benefit. This is because retail is not an easy game.
Some of the private sector banks have an advantage there. In PSUs, banks like SBI, Bank of Baroda has the advantage. If you want to do retail business in a big way, you need distribution reach, strong processing capability and the capability to have faster turnaround times, which depends upon how much technology advancement happens in banks or among the customers. So, there are many factors which impact your capability to grow retail loan book.
SBI has an advantage because of all the enablers—the distribution reach, technology, processing, centralising processing, liquidity, capital, risk management architecture. There are so many enablers for SBI that we will continue to dominate retail market which we did last year too. Today, SBI is the largest home loan and car loan provider. On our YONO platform, we are disbursing Rs 25-30 crore pre-approved personal loans. In the last four months, we have built a loan book of Rs 5,000 crore just on application.
Retail is something where you need to invest lot of time in updating the technology and processes.
There has been an NCLAT judgment in Essar Steel case which tells the financial creditors how they should look at distribution of funds. In a situation like this, the court feels that operational creditors were not treated fairly. Should the courts get into the commercial decision making that is the CoC which is built of financial creditors and that it has taken a certain decision? Should the court come in and say that the decision is wrong?
One is that lenders are not satisfied with this judgment and the Supreme Court will have a look at it. Many decisions of the Supreme Court like the Swiss Ribbon case, which laid out a lot of principles in IBC, seems to be at variance than what was stated in Swiss Ribbon Case.
The law has evolved. There is a complete clarity about the waterfall when an enterprise goes into the liquidation. It does not leave any scope for any doubt. The option for the secured creditor to keep outside the insolvency process. The option to pursue either under SARFAESI act or DRT is also available.
IBC, during the resolution process, made it clear that it was never meant to be a recovery process. Unfortunately, it got confused with the recovery process for the secured financial creditors. So, that is very clear that it is a resolution process. But the danger is that even the resolution process there is no incentive for the financial creditors to pursue that course then it can be counterproductive because I have the option of not accepting any resolution plans and press for liquidation where I have superiority. I also have an option of keeping out the resolution process and enforce my security under either SARFAESI act or DRT. DRT takes long time. So, in IBC, if it takes similar time, which is three years to resolve and that too I have the parity with the operational creditors, then bank as a lender, as a secured creditor will have to evaluate to keep aside of IBC or be in IBC or press for liquidation.
But if these laws stay in the current form or judgment, then there needs a lot to be amended in IBC to bring more clarity around the secured financial creditors. The issue is that if in the IBC process the security of the secured lenders is completely taken away and they have non-preferential treatment then this becomes the worst option for the secured creditors, or the ways why do I do the secured lending. I can simply have that ‘I Owe You’ from the borrower and lend them. And unsecured lending does not come at 9 percent, it comes at 15-16 percent.
So, I think these are many issues which have come up. But I am very confident that the cause of the entire process and law is new. So, in the next two to three months, clarity will emerge on all these issues. But as of now, the NCLAT judgment has put secured financial creditors at a disadvantage in an IBC resolution process. It is very clear. If at the resolution stage we know that this is going to be the distribution, then lenders may decide not to accept it.
Do you think that will happen?
Let’s not pre-judge at this stage. Let us wait for what happens in the Supreme Court or what have been said. In IBC, we have seen so many amendments time to time. This is high time that this limitation of 270 days doesn’t get resolved, it should be allowed to go to liquidation. I don’t think it works just by extending it to two-to-three years.
IBC is quick resolution remittance where all category of the creditors sits and may vote differently. Even if you look at Section 230 of the Companies Act, it recognises different class of creditors. So, you will need an approval of 75 percent of the shareholders and 75 percent approval from secured financial creditors. You need 75 percent consent from the operational creditors.
So, it is not the law does not recognise the different class of creditors but within IBC because there is no waterfall mechanism in the IBC process and rightfully so as it is resolution. Resolution happens when creditor has to be satisfied. But that does not mean that the secured financial creditors and the operational creditors who are essentially not equal becomes equal. So that is our primary response or reaction.
But ultimately, as I said, once the matter is heard in the Supreme Court and whatever is the outcome or rather, we will be representing even for amendment which will bring some clarity.
Will you approach the government?
We will. Otherwise the whole intend around the efficient resolution mechanism gets defeated then it will be not good. Because after a long-fought battle, the law came in. Nothing should be done when it becomes a backward move or backward step. But these are important issues and I am sure they will be addressed.
I am going to stretch that 270-day period, if it doesn’t get resolved then it will go for liquidation. The law in its text says that very clearly often the interpretation is it’s not mandatory but dictionary. When these delays happen like in Essar Steel, there is a bidder who has been waiting since October last year. Obviously, there is time value for the money that they brought in with investment horizon. The bank deals with some of these foreign funds who have bought loans. All these different stakeholders which are not directly involved between lender and the borrower, but they are also getting impacted. Do you think that could impact the bidder interest or foreign fund interest?
It is my view that these 270 days should become mandatory for the resolution. Otherwise, it should be taken out of that process and go into liquidation. If we leave it discretionary, then we will continue to have a situation where the matter goes on.
I am again re-emphasising that IBC is not about the recovery which secured lenders also must understand. Dr. Sahoo (MS Sahoo) is the chairman of IBBI and I have clarified on several forums that lenders mindset, even media’s mind state as they ask what the recovery is. It is not recovery, but to protect the corporate debtor. It is important to protect the corporate debtor because are so many people who are dependent on the corporate debtor.
So, one distinction which IBC brings in that corporate debtor is that everybody tries to protect, keep away the promoters. The law is not about the promoters, but entity. But if it takes three years to resolve,then we are having DRT mode.
One newspaper quoted that there is large hole founded in one of your accounts which was panel initiated by SBI. Everyone was happy with the fact that PCR for lot of well managed banks have moved up and lot of provision has been done and now there are these accidents which are coming up. PNB also revealed very large amount. How sure can state be?
It does not impact PCR. Most of these accounts already has been classified as non-performing loans and many of them are either D2 or D3.
For example, the case you are talking about PNB. So, I did 100 percent provision last year. So it doesn’t matter. As far as the holes are concerned, we are finding everywhere. The whole effort is to clean up the system. We are going through that pain and I hope that in future we will have a road which is much smoother and not with potholes.
How long will it take, just not for SBI but for entire space?
We have lot of holes and potholes which just like in any road in a city. We need to have smooth and clean road, and everybody is learning it. When a huge shift happens after many years, you are accustomed to do your business in certain way.
Banking is all about trust and that trust is done by verification. We learn lessons when we fix a road but still there are potholes appearing. We are learning it in hard way at the bank level. The corporates also must lend in their ways and entire system on auditors.
When we lend money, we rely on something like audited statements and financial statements. In case, if the people assigned for their work have not done their duties and they are penalised, their entire ecosystem is exposed and it is exposed for the good. Once we are through this painful process which we are going through, things will be much better.
Will it last for couple of quarters?
It is not about quarter. If you ask me about the recognition part, then there are no issues. It will be normal and there will be no accumulation. Accumulation was at the AQR level. People witnessed that most of the banks were into corporate lending in March 2018 and there was huge NPA. SBI itself declared NPA of Rs 1 lakh crore. This year, in March, we declared Rs 32,000 crore. Note the drop.
Will Rs 32,000 crore will become Rs 5,000 crore? No. There is certain percentage of your portfolio where you want to have tolerance limit.
For example, If I have loan book of Rs 23 lakh crore, we should ideally not exceed 1 percent. But we are a part of the macroeconomic system. Whatever we need to do to improve our internal processes, we have done lot of changes in that process and made it more risk oriented, better assessment, better monitoring. But that is still work in progress.
At the same time, if the ecosystem or larger economic environment doesn’t support then what will you do? Therefore, the improvement in the macroeconomic system is also needed. Given the environment in which we are, if I can manage the fresh creation of NPA within the range of 1.5-1.6 percent, that will be a benchmark which we will leave at. Ultimately, for long term it should not be more than 1 percent. It is not easy to achieve in current environment.
For the fundraising, will it be front-ended or back-ended when it comes to FY20 QIP?
At present, there are many things on table. We will take a call at appropriate time. There is no plan for front-end or back-end. I would like to wait for September quarter because during that period, there are which may happen in terms of recoveries and certain other plans. Therefore, we are in no hurry.
At the opportune time, we are not averse that whatever our plan is, we are our resolution of raising Rs 20,000 crore. However, I don’t think we intend to raise that amount of capital. We will assess the situation and that is dynamic situation. If I take the capital, I should have the opportunity to deploy it too. If I take the capital and if there is no growth,how can I service that capital?
For FY20 and FY21, what will be your path for growth? Where do you see the opportunities for lending?
I see a lot of efforts in the affordable housing. Not only housing loans, but also in the construction segment. We revamped our EPC in a big way last year. For some time, we were keeping away from hybrid annuity model projects. However, we have revamped the policy and I am happy that the concessioners accepted that policy. We have tightened policies in most of the industries. Approach of our bank is, the portfolio of retail (including agriculture), SME, corporates is at 42-58 percent. That ratio will not have significant change.
Therefore, the retail story will continue as it is where it will focus on housing, agriculture, SME. It will not undergo a change. Within the corporates, there are policies which are tightened on how do you capture cash flow and do floor-based lending.
The budget has spoken about of $1.5 trillion of investment and Rs 100 lakh crore in infrastructure will give huge opportunity for banks like SBI, which as compared to many other banks which has good capability and experience in financing the projects. Therefore, there will be action on road sector and renewable energy. Also, oil and gas structure because of city gas projects and the refinery which are coming in Rajasthan. If I look at project finance pipeline in bank, we are seeing demand in these three sectors.
Other than these, any big projects in manufacturing or those manufacturing, I am not seeing that demand in project finance pipeline. The rest will be delivered by working capital requirements. I think there is need to revive the EPC sector, which was hit in the last cycle.
However, there are a few good EPC companies left at present. Only L&T and Shapoorji Pallonji cannot build whole infrastructure in the country.
With certain safeguards, and bank is open to business for sure. Only thing is more discipline is required as far as lending and borrowing is concerned.