Rajnish Kumar, Chairman Designate, State Bank of India (Source: SBI)

SBI Chairman Says Challenges Won’t Derail Insolvency Process

The head of India's largest lender said despite the recent challenges to the nation’s new bankruptcy law, things are "by and large” looking fine.

It’s a new law and things are still getting tested but that should not dishearten anyone, Rajnish Kumar, chairman of State Bank of India, told BloombergQuint in an interview. “Courts have not avoided or halted the process. The committee of creditors have been allowed to proceed. The final decision is up to the NCLT.”

Lenders were already aware that under the Insolvency and Bankruptcy Code, the resolution plan approved by the committee of creditors would not be the final decision, Kumar said. “Finally, it’s a judicial process even as the right to speak remains intact. It’s an evolving process and we have to give it a chance.”

Many processes of the IBC will get tested. But on the whole, I would say that the adoption of the code is one of the most significant reforms this government has carried out. 
Rajnish Kumar, Chairman, SBI

India's insolvency process has faced several challenges after the Reserve Bank of India last year ordered large stressed accounts to go through the National Company Law Tribunal. In February, the central bank whittled down bad-debt resolution methods to one: if banks can’t fix a sour loan in 180 days, it will be referred to the court. The nation is struggling to unwind more than Rs 8 lakh crore of bad loans.

On an average, lenders could recover at least 40 percent of their investments in the stressed assets facing insolvency. Most of it will come from the Reserve Bank of India’s first list which has “some very good assets”, according to Kumar. “Smaller sized loans don't fetch as much value as the large scale plants,” he said. “There is considerable interest in Bhushan Steel and Essar Steel, but the same cannot be said for a Monnet Ispat or Electrosteel Steels.”

However, he added that setting a benchmark for recoveries is difficult because there are many factors to look at.

Depending on the prospect of the sector, quality of physical asset by the outgoing promoters, the value differs and the range of recoveries will be between 25 percent and 75 percent in most cases.
Rajnish Kumar, Chairman, SBI

Power Sector Stress

The power sector contributed to a bulk of SBI’s bad loans, with nearly two-thirds of its slippages in the October-December quarter coming from the sector. And that figure is only going to go higher. “In the fourth quarter, slippages will mostly be from the power sector. There are four or five accounts,” Kumar said. He added that those accounts are not that big and “the problem is not out of hand”.

Kumar said that much of the stress in the sector is from independent power producers. Mst projects SBI has financed have been put up after 2010 when the assumption was that India will face a power shortage, there will be more demand and more power purchase agreements from the government, he explained. “Somehow because of weak financials of companies, that has not materialised,” he added.

The key issue even today is that the PPA is remunerative to the power producer. That stress is very much there.
Rajnish Kumar, Chairman, SBI

Kumar wants more power purchase pacts from the government. “In last two years, power purchase agreements issued by discoms were negligible, and that's what is causing the problem.”

Working out a resolution plan for power sector accounts within six months, as was mandated by the RBI in a Feb. 12 circular, "will be challenging”, Kumar admitted.

We’ll work sincerely to resolve assets within 6 months. If that doesn’t happen the only option would be the NCLT.
Rajnish Kumar, Chairman, SBI

Governance At PSU Banks

There is scope for improvement in corporate governance standards at state-owned banks, said Kumar, agreeing with RBI governor Urjit Patel’s recent comments on the need to strengthen public banks. “It is incumbent upon the management to work hard to alleviate the negative perception around PSU banks' corporate governance standards,” he said.

According to him, some level of consolidation in the public banking space will be required, but not immediately. “Consolidation among weak banks cannot happen. For any consolidation to happen, first the financial position has to improve for all the banks.”

Once that happens, then the country can have one or two large public sector banks, along with some regional banks where there is requirement and some niche banks, Kumar added.

Watch the full interview here.