State Bank of India, the country’s largest lender by assets, will be transferring ₹20,000 crore worth of non-performing loans (NPAs) to the newly created bad bank in the current fiscal.

As of June 2021, the bank’s NPAs stood at ₹43,153 crore (1.77%), while gross NPAs were ₹134,259 crore (5.32%). The net NPAs at the bank could rise if the restructured loans turn duds. In the first quarter of the current fiscal (FY22), the bank had approved ₹ 5,246 crore worth of loans for restructuring, while ₹2,056 crore of accounts were pending for approval. As per the Reserve Bank of India norms, NPAs have to be classified as sub-standard, doubtful, and loss assets, before being eventually written off.

“We have already earmarked the accounts we will be transferring [to the bad bank],” chairman Dinesh Khara told Fortune India in an exclusive interview. Without disclosing the type of accounts being transferred, Khara added, “We are transferring only those loans where we have inter creditor agreements (ICA).” The ICA is a pact entered into by public, private and foreign banks to speed up the resolution of stressed assets under consortium lending in the range of ₹5 crore to ₹500 crore.

Though under the bankruptcy code’s resolution framework SBI managed to recover only 40% of ₹1.50 lakh crore of NPAs, Khara believes the bad bank will be able to fetch much better value. “Bad band works on the premise of value aggregation and the process itself is a value accretive. All those lenders who have signed the ICA can transfer accounts to the bad bank at true value, which will also be subject to the Swiss challenge. So, there is a right price discovery that will happen,” explains Khara. In consideration of the transfer, the lenders will get 15% in cash and 85% as security receipts which will be guaranteed by the Centre for five years. If, within the stipulated period, the lenders are not able to recover their money from the assets, the Centre will make up for the shortfall.

Image : Chetan Singh

The country’s maiden bad bank is a two-tiered entity with the National Asset Reconstruction Company (NARCL) working as an asset reconstruction company (ARC) and the India Debt Management Company functioning as an asset management company, which will restructure and turn around the bad loans. In the Union Budget, finance minister Ms Nirmala Sitharaman had stated that the ARC would manage and dispose of the assets to alternate investment funds and other strategic investors. “It [bad bank] is a vehicle that ensures optimisation of value and, secondly, the managerial bandwidth for the commercial banks can be put to use for actual developmental work,” feels Khara.

Though the bank is not seeing huge stress in the corporate book, it is seeing pressure on the MSME book where the net NPA level is 9.22% (₹26,203 crore) as of June 2021, while the corporate loan book NPA is 7.83% (₹61,897 crore). In an indication that cash flows continue to pose a challenge for SMEs, Khara mentions, “We are seeing more coming forward for restructuring of loans which wasn’t the case earlier. But we are ” Fresh slippage in the SME segment was ₹6,416 crore in Q1FY22. However, Khara does not expect the overall NPA to cross 9%. “The NPAs have traditionally been in this range and we don’t see a sharp jump. Most of the accounts that are being restructured are working capital loans in the range of ₹5 lakh to ₹10 lakh,” says Khara.

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