Concerns about a rise in bad loans have risen as larger companies are better positioned and banks are increasingly using analytics to spot non-performing assets. Swaminathan Janakiraman, Managing Director of Risk, Compliance and Stressed Asset Resolution Group of State Bank of India (SBI). The new government-backed bad bank will ensure quick resolution of large accounts through consolidation of bad loans, explains Swaminathan MC Govardhan Rangana And Joel Rebello, Edited excerpt:
What is the Outlook on Stressed Assets?
There is no need to be pessimistic. But at the same time, we don’t want to be too optimistic. The slippage ratio has been good despite two years of Covid. Both the high frequency data and feeler on the ground look pretty positive. High-contact industries and the unorganized sector, which are most affected by Covid, do not have much bank exposure. Secondly, the way some sectors have made a comeback, we are confident that things will be fine. Slippery will happen but not like we saw in the 2015-2018 cycle. The balance sheets of both the corporate and the bank are in good shape.
Convergence among the government, regulators and lending institutions has helped to address the problems already rather than postponing them. Today we do not need physical monitoring as we have data points like GST and tax returns.
How do you use this data? What are the possible red flags?
A significant appraisal has been the RBI’s Crilic database, which contains information on all credits above Rs 5 crore. If a particular account has slipped into the SMA range elsewhere, it comes to my notice on a weekly basis. 10 years ago we didn’t have a comparable instrument and we used to rely on exchange of information between banks, which was never enough.
Our Early Warning System (EWS) tracks about 200 different parameters on what is happening in our account, 40 of which come from Krilick. It also tracks non-financial parameters such as changes in boards or even exchange filings. We also started the credit review department in 2018 which is completely free. Now post approval monitoring is also centrally driven as we cannot leave it to a single relationship manager. We now plan to replicate this in our regional and local head offices. As a trial, we have run it on accounts of Rs 50 crore and above at the center. From April we will decentralize it and put it into accounts of Rs 5 crore and above in every regional office.
The nature of banking stress has changed – from corporates to retail and SMEs. How do you deal with this change?
Most of the post-Covid hits have been felt by MSMEs and they are the most vulnerable as they do not have the deep pockets or markets or connections that a large corporate enjoys. In the retail sector, banks had no exposure to the unorganized sector and have been lending mostly to the salaried class. For example, a major chunk of SBI’s salaried customers are from state or central government or public sector entities or large corporates; So that our books do not show too much tension. But I’m sure people in the market could see it with other types of institutions. In this way, today the tension is spread wider than before. In aggregation, even these amounts may not be large, which means that it is easy for us to overcome or overcome this tension. The NPA plus stressed book of the MSME sector has generally been between 6% and 8%, and both these books are showing a similar trend. As of now, what we are seeing is not normal. Retail has been excellent with NPAs below 1%. Collection efficiency is back to normalcy after taking a hit in February.
When the pandemic broke out, some rating agencies had expected a total banking slippage of Rs 8 lakh crore, but at that time our chairman said that their estimate was not more than Rs 2 lakh crore. We were confident that mitigation would be done to deal with the disaster. The actual slippage was not even Rs 2 lakh crore as we are continuously monitoring these accounts driven by data.
How is the present restructuring different from the work done in the previous CDR regime?
Before 2015, there were several attempts by the regulator and banks due to the huge corporate debt pile-up. The efforts were to save an account to revive and revive the company. This gave the promoter several chances to get back to normalcy.
After 2015, we learned our lesson on what to do to deal with corporate stress. The IBC process brought a systematic solution to the corporate tension. A part of the stress got absorbed in the IBC process and the restructuring was not part of the book, and in the remaining accounts where the restructuring is being done today, the entire approach is based on feasibility. Today, any restructuring process has to be vetted by the rating agency and the lending institution must be assigned a minimum RP4 rating before restructuring.
The IBC timeline has been delayed. How do you see it?
We have three stakeholders – the borrower, the lender and the judiciary. Each of these timelines is serious to follow. But there has to be capacity building as well. There are litigations going on in all the courts today, which are overloading the system. The IBC as a law is barely five years old, of which we had two years of Covid tolerance. I think it is too early to pass judgment on its efficiency. Lenders now know that running a business is not birth-proven; So they try to challenge in as many forums as possible. There are challenges from admission to approval of the resolution plan. One piece of law cannot envisage a timeline for all this. But as a lender we are concerned about delays as it leads to significant value destruction. But as a lender, I am happy that the resolutions are being done in time.
Is there any fear that it will replace another DRT?
Not strongly, as the resolution professional and the entire structure of the CoC are very unique to IBC. In DRT, as a lender, I file the case and a presiding officer hears it, which is similar to a civil court. The DRT brought in a Recovery Officer setup, which added charm compared to a civil or a commercial court. IBC is a more sophisticated version where you have a resolution professional and a COC; Hence decision making becomes faster. The RP becomes the CEO of the company and the CoC is like a board that means the borrower is no longer running the company. In DRT it is a debtor in possession whereas in IBC it is a creditor in possession except SME Prepack. Because of these two differences, IBC is much better than DRT. IBC’s approach is resolution, recovery is contingent.
Enforcement of personal guarantee is also a new aspect of IBC. What’s your point of view?
This is an additional tool. It is still developing and results will take time as it will still come in NCLT. This may again come into focus if there is an increase in capacity or a special NCLT is set up to deal with matters of parent company law. A guarantee is an intangible security. The amount you can recover through a personal guarantee is not something you can anticipate. It has to be tested on the ground when you invoke it. I think we should not bet too much on personal bankruptcy because corporate debts are in thousands of crores and when you apply personal guarantee, there is no way you can recover any comparable number.
After all the restructuring and IBC, we have gone back to a national ARC. What is it going to achieve?
None of the existing ARCs have enough capital to handle the pressures of the banking system. We need such ARCs which can come only when there is sufficient capital. This institution will be owned by those banks which will not have any difficulty in providing capital. It will acquire huge assets, which is why the cut-off was Rs 500 crore and more exposure to the banking system. Due to the mandate of the Government, NARCL will be able to achieve 100% exposure in the banking system. This gives them the ability to resolve the property with complete freedom. The third advantage is that the SR will be guaranteed by the government at face value if resolved within five years.
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