Worries over bad loans proved overblown: SBI

Concerns about a rise in bad loans have proven to be overblown as larger companies are better placed and banks are increasingly using analytics to prevent non-performing assets, said
Swaminathan Janakiraman, Managing Director of Risk Management, Compliance and Distressed Asset Resolution Group, State Bank of India (SBI). The new government-backed bad bank will ensure rapid resolution of large accounts through the consolidation of bad debts, Swaminathan said
MC Govardhana Rangan and
Joel Rebello. Edited excerpts:

What is the outlook for stressed assets?

You don’t have to be pessimistic. But at the same time, we don’t want to be very optimistic. Slippage ratios have held up well despite two years of Covid. High frequency data and ground feelers look quite positive. Contact industries and unorganized sectors, which are most affected by Covid, do not have too much banking exposure. Second, the way certain sectors have rebounded gives us confidence that everything will be fine. There will be slippages, but not as we saw in the 2015 to 2018 cycle. Corporate and bank balance sheets are in better shape.

Convergence between the government, the regulator and the credit institutions has allowed issues to be resolved upstream rather than postponed. Today we don’t 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?

A critical assessment was the RBI’s Crilic database, with information on all credits 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 didn’t have a comparable tool 10 years ago and we relied on the exchange of information between banks, which was never enough.

Our Early Warning System (EWS) tracks nearly 200 different metrics on what’s happening in our account, 40 of which come from Crilic. It also tracks non-financial metrics such as advice changes or even trade statements. We also launched the credit review service in 2018, which is completely independent. Then, there is also a post-sanction follow-up managed centrally from now on because we cannot leave it to the same relationship manager. We now plan to replicate this in our regional and local headquarters. As a trial, we ran it centrally on Rs 50 crore and above accounts. From April we will decentralize this and put it in each regional office for accounts Rs 5 crore and above.

The nature of banking stress has changed from retail and SME to corporate. How will you handle this change?

The bulk of the post-Covid hit has been felt by MSMEs and they are the most vulnerable because they don’t have the deep pockets, markets or relationships that big business enjoys. In retail, banks had no exposure to the unorganized sector and lent mainly to the working class. A large portion of SBI’s salaried clients, for example, are from state or central government, public sector entities, or large corporations; that way we don’t see a lot of stress in our books. But I’m sure in the market people could have seen it with other types of institutions. In this way, stress is now more prevalent than in the past. In aggregation, these amounts may also not be large, which means that it is easier for us to address or remedy this stress. The more stressed NPA book in the MSME sector is usually between 6% and 8%, and these two books show a similar trend. So far, what we’re seeing isn’t out of the ordinary. Retail was excellent with NPAs below 1%. Collection efficiency has returned to normal after taking a hit in February.

When the pandemic broke out, some rating agencies expected the total bank slip-ups to be Rs 8 lakh crore, but our chairman at the time said his estimate did not exceed Rs 2 lakh crore. We were confident that mitigation measures would be put in place to deal with the disaster. The actual slippages were not even Rs 2 lakh crore because we constantly monitor these data-based accounts.

How does the current restructuring differ from what was done under the previous CDR regime?

Before 2015, multiple efforts were made by the regulator and the banks due to the huge indebtedness of the companies. Efforts were to register an account to try to revive the business. This gave the promoter multiple chances to return to normal.

After 2015, we learned our lessons about what to do to deal with stress in business. The IBC process has brought an orderly resolution to corporate stress. Some of the stress was absorbed in the IBC process and was not on the restructuring book, and in the remaining accounts where restructuring is underway today, the whole approach is based on viability. Today, any restructuring process must be approved by a rating agency and a minimum RP4 rating must be assigned before a credit institution can undertake a restructuring.

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

We have three players – borrowers, lenders and the judiciary. Each of them is serious about keeping to the timeline. But capacity building must also take place. Today, there are disputes in all the courts, overloading the system. IBC as legislation is barely five years old, of which we have had two years of Covid forbearance. I think it is too early to pass judgment on its effectiveness. Borrowers now know that running a business is not a birthright; so they try to challenge in as many forums as possible. There are challenges right from admission to approval of the resolution plan. A legislative text cannot provide a timetable for all of this. But as a lender, we are concerned about delays because they lead to significant value destruction. But as a lender, I’m glad the resolutions are coming in time.

Is there a fear that it will become another DRT?

Absolutely not, because the whole structure of a resolution and CoC professional is very unique to IBC. In DRT, as a lender, I file the case and a president hears it, which is very much like a civil court. The DRT brought in a collection agent configuration, which was an added attraction compared to a civil or commercial court. IBC is a more refined version where you have a resolution professional and a CoC; therefore decision making becomes faster. The facilitation that the PR becomes the CEO of the business and the CoC is like the board of directors means that the borrower no longer runs the business. In DRT he is debtor in possession whereas in IBC he is creditor in possession except in SME prepackage. Because of these two differences, IBC is far superior to DRT. BAC’s approach is resolution, recovery is incidental.

The enforcement of personal guarantees is also a new aspect of BAC. What is your point of view ?

This is an additional tool. It is still evolving and the results will take time as it will always come to the NCLT. Again, this can be highlighted if there is an increase in capacity or if exclusive NCLTs are put in place to deal with originating company law issues. A guarantee is an immaterial security. The amount you can recover through a personal guarantee is not something you can estimate in advance. It must be field tested when you summon it. I think we shouldn’t bet much on personal insolvencies for the simple reason that corporate debts are in the thousands of crores and when you apply a personal guarantee there is no way to recover a comparable number.

After all the restructuring and the IBC, we went back to a national ARC. What will this accomplish?

None of the existing ARCs has sufficient capital to take on the banking system crisis book. We need ARC of scale which can only come 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 denomination was Rs 500 crore and above exposure to the banking system. Due to the government mandate, NARCL will be able to gain 100% exposure to the banking system. This gives them the freedom to resolve the asset. The third advantage is that SRs will be guaranteed by the government at face value if resolved within five years.


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