That the merger of six banks with State Bank of India (SBI) was a colossal process and would give considerable grief to the lender was obvious. But the fact that the pain has stretched for one more quarter despite clean-up efforts for more than six months shows that the country’s largest bank is still figuring out its game as a larger version of itself.
Indeed, much of the pain on asset quality can be traced to SBI’s five associates that were merged with it. The rise in fresh slippages, fall in net interest margin and the bank being saddled with a larger bad loan stock are indicators that it was one expensive merger process.
As of June, nearly 10% of SBI’s loan book was bad, adding up to a massive gross bad loan stock of Rs1.9 trillion. Fresh slippages rose to Rs26,249 crore, higher than the previous quarter but lower than a year ago. A notable factor was that the lion’s share of slippages was from outside the corporate loan book. Farm loan waivers, end of forbearance on loan classification related to demonetization and the merger itself bit SBI badly during the June quarter.
Out of the total slippages, only Rs8,363 crore were corporate loans. Around 40% of slippages were agriculture loans and 35% were from small and medium enterprises (SMEs).
The management explained that since its staff was preoccupied with realigning processes after the merger, efforts and follow-ups on loans below Rs50 crore were not done. Essentially, efforts towards recovery and even mapping accounts onto a common platform were done only for accounts greater than Rs50 crore. Given that the sharp rise in slippages is mainly because of process-related delays, SBI believes its recoveries and upgrades will surge in the coming quarters.
The management should be given due credit for putting out a confident outlook for the rest of the financial year, unlike previous quarters where the guidance was at best tepid. SBI believes that for the current year, its slippages from agriculture, SMEs and retail will be contained at Rs30,432 crore, while close to Rs16,790 crore would be either upgraded or recovered. In short, bad loans from this segment would actually come down to Rs7,503 crore from the Rs13,532 crore in the June quarter.
The outlook should put to rest some concerns of investors, and the stock that was hammered down over 5% could see some relief. But it would be foolhardy to abandon caution. The bank still has Rs50,247 crore worth of exposure to the dozen accounts that the Reserve Bank of India has asked banks to act on under the Insolvency Bankruptcy Code. One number that damns SBI is loans written off during the quarter. Write-offs amounted to Rs13,176 crore and adding the accretion to gross bad loan stock, it is close to Rs43,000 crore. SBI’s total loan offtake during the quarter was just a little over Rs18,000 crore.
What does it say about the economy? The fact that SBI’s loan book hardly grew while existing loans decayed faster is a clear indication that the economy is still limping. But if one goes by the management’s comments, the year ahead will be less painful.