Mumbai: The State Bank of India will use all available means to resolve the over Rs.98,000 crore of bad loans on its books, said chairman Arundhati Bhattacharya, as she sought more tools from the government and the banking regulator to tackle the surge in stressed assets.
Bhattacharya, whose current term at the country’s largest lender ends in September, said that tackling the bad loans, pushing through a merger of the five associate banks with SBI and ensuring the bank keeps pace with changing technology will receive top priority in the current fiscal.
Of these, finding a way to bring down the level of stressed assets on the bank will undoubtedly receive the most attention, she said.
“There is no one solution that fits all,” said Bhattacharya when asked whether the bank would look to resolve bad loans internally, through its stressed asset management group or through sales to the asset reconstruction companies (ARCs).
“We would like to use whatever is at our disposal, to get the things moving so that the wheels of the economy get moving, so to speak,” she said.
Reserve Bank of India’s (RBI) December directive to banks to clean up their balance sheets by March 2017 has led to unprecedented surge in bad loans in the past two quarters, forcing lenders to set aside more money.
That has led a sharp erosion in profits. SBI’s March quarter profit fell 66% to Rs.1,264 crore from a year earlier.
SBI’s gross non-performing asset (NPA) ratio rose to 6.5% of total loans at the end of March, from 5.1% in the previous quarter.
India’s 40 publicly traded banks are now holding Rs.5.8 trillion in bad loans. While a large part of the pain of reclassifying stressed assets was taken in 2015 -16, a number of banks have put in place “watch lists” of stressed assets suggesting that there may be more pain ahead.
“We expect asset quality stress would continue to persist along with elevated credit costs for the next 3-4 quarters,” said a 6 June report by Religare Securities.
Bank chiefs, including Bhattacharya, are now pushing for more tools to help resolve the pile of stressed assets which is impeding the flow of credit into large parts of the Indian economy.
Although provisions such as strategic debt restructuring, which allows banks to take over stressed assets by converting the debt into equity, have been introduced, banks say that they need quicker resolution mechanisms as recoveries through the courts take too long.
“You have to go to war with a sword and a shield. You cannot go to war with bare hands. We need to have these resolution mechanisms. Obviously, it is something that has to be done (cleaning up of bad loans) and there are no two ways about it,” said Bhattacharya.
Ideas being discussed to quicken the pace of resolution include a fund, which can provide working capital finance to stressed firms at affordable costs and a provision which may allow banks to convert the unsustainable part of debt on a company’s books into long-term securities.
On Friday, Mint reported that the RBI may let banks convert part of the debt on a stressed firm’s books into securities, such as convertible preference shares. This will help slow any further build-up of bad loans while also providing relief to companies whose operations have been stymied by excessive debt.
Bankers are also keen on a stressed debt fund that can help bridge immediate funding needs to a struggling company. While such funds do exist in the market, they are known to charge interest rates in excess of 18%, which sometimes only adds to the company’s troubles in the long term.
“It is not that we are not in a position to provide funding. As I said, the risk aversion is very difficult to overcome. If something is already classified (as a non-performing asset), and you want to give them more money so that they ramp up capacity, it is very difficult to get it past a lot of bank boards,” said Bhattacharya, adding that a stressed debt fund may be able to take such decisions quicker and ensure the availability of working capital at appropriate cost.
“We feel that we have been in this cycle for quite a long period of time and may be it is time that we dug ourselves out of it,” Bhattacharya said.