Dinesh Khara took over as chairman of the State Bank of India at the peak of the pandemic. Covid 2.0 may not have hit the economy as hard as Covid 1.0 but the MSME sector—among SBI’s key target group—continues to reel under its impact, although big companies are safe. Khara believes that although the stress in the system is far from over, FY22 is already showing signs of a revival.

The Macro Picture

What is the current state of the economy, and do you see a scenario similar to FY21?

In FY21 we had seen a flight of safety following the crisis at PMC Bank and Yes Bank, resulting in a higher growth rate of 16-17% in deposit accretion. But [in] this fiscal we could see a normal rate of growth of 10%, possibly because the higher death rate in some states during the second Covid-19 wave could have prompted middle class and upper middle class custom - ers to hold on to cash for potential health emergencies.

Post June 16, once the partial unlock began, we are seeing an improve - ment in economic activity. Since a majority of the population has been vaccinated, at least, with the first dose, to that extent the economy’s ability to handle the pandemic has increased substantially. Given that the second wave did not see a universal lockdown, it did not completely disrupt economic activity, but it certainly impacted the supply chain and, perhaps, we got to see its impact on the inflation rate.

With economic activity picking up, I feel FY22 should look much better because there was hardly any activity in the last two quarters of FY21. Hopefully, with the kind of support extended by the Centre through the ECLGS (Emergency Credit Line Guarantee Scheme) 1 and the focus on creating healthcare infrastructure, it will go a long way in reviving economic activity.

Is it the impact of supply-side disruption on inflation that is holding back the RBI from hiking the repo rate?

If the supply constraints are ad - dressed, which to my mind have been addressed to a greater extent by the unlocking [in the economy], and also if the monsoon is good, we should be in a much better position on the CPI. Though the impact of fuel prices, partly due to global conditions, is visible, once the supply constraints are addressed, the inflation rate should come down from 6% to within the targeted range of the MPC (Monetary Policy Committee).

But the spate of failed auctions shows that the market doesn’t feel the RBI is doing a good job at managing inflation.

I agree, but if you look beyond the near term, interest rate may not be the only determinant for revival of economic growth. Nevertheless, a softer interest rate regime will certainly encourage people to borrow and that way we could see a revival in the economic cycle. While I don’t see the possibility of a further rate cut, there may not be an [immediate] increase either.

What steps have been taken to ensure frauds don’t happen or if they do, they can be caught early?

Our credit delivery mechanism has been strengthened quite a lot over the years, and we have ensured that there is oversight even for people not associated with the business. We have got the credit review, an intermediary department between the business and the committees which sanction the loan. This brings in enough objectivity and, also, the chairs of the committees are people who are away from the business. While it’s an ongoing process, we were well off in the past and will continue to strengthen our underwriting processes.

So, what needs to be done to spur growth?

When it comes to revival, the Union Budget’s focus on infrastructure, particularly roads, could see it [infrastructure] as one of the frontline sectors in reviving the economy. In the current financial year, exports as a sector is doing well, since western economies are looking up. With China looking inwards, it has given an opportunity to Indian steel makers to look at exports and that will be the other core sector that will contribute to [GDP] growth. FMCG and pharma could become the other growth engines of the economy. With around 60 crore people vaccinated, and as we see a greater certainty of the vaccine being available, the positivity will give a further impetus to various growth levers in the economy.

The Pain in the Books

Can you give us a sense of where exactly you are seeing growth in the corporate loan book?

For now, corporate loan book growth is quite muted as many corporates have gone in for deleveraging. Last year, in the top 15 industries, we saw deleveraging to the extent of ₹2 lakh crore, thanks to the easy money in circulation on the back of stimulus from central banks across the globe. All that liquidity found its way into emerging markets, such as India, where corporate borrowers could substitute borrowings with equity or raising NCDs from the capital market. But I feel this year the money will flow back to developed markets and there may not be as much flow in the domestic economy. Maybe that will be the time when corporate borrowers will come back to banks to increase their borrowings. Our corporate loan book is around ₹10-11 lakh crore, of which about 30% would be working capital loans and 70% would be term loans. Of the working capital book, 30% has not yet been availed of and similarly of the term loans, the unavailed limit would be 28%-29%.

It’s low, because, normally, working capital increases when demand goes up. Capacity utilisation is currently around 65%-70% and that’s not the time when corporates look at new projects. Maybe once the revival process begins, corporates will feel encouraged about availing the sanctioned limits and start implementing their projects. Of course, in certain pockets, such as iron and steel, there is much better demand and augmentation of capacity. Though pharma is doing well, the sector hardly borrows from the banking system and prefers to access the capital market.

I expect by the end of the second quarter we should see a revival. But the big investment phase will be a function of how corporates see demand unfolding.

If there is no clear visibility, companies will be apprehensive of capex as these investments carry a minimum payback period of five to 10 years. But this year we could see some traction in the corporate loan book as foreign flows may not remain as strong if opportunities are available elsewhere in the globe.

How well do you think India Inc. has tightened its belt during the pandemic?

As far as large corporates are concerned we are not really worried but when it comes to MSMEs, their cash flows have been disrupted and that is a concern. Our MSME book is currently around ₹2.40 lakh crore, of which NPAs is around 9%.

Earlier, MSMEs were not opting for restructuring but this time they have come forward for restructuring, but we are doing so only after carefully examining the scope of their cash flows getting restored.

There is a greater scrutiny. Since small value accounts of ₹5-10 lakh are being restructured, we expect to contain NPA in the portfolio at 9%.

How would you rate the performance of the IBC as its recovery rate hasn’t been that impressive?

IBC is more of a resolution framework and its ability to resolve depends, one, on the state of the real economy. If there is really a demand in a particular sector, then the brownfield capacity can fetch much better value. Second, how much the resolution will help in recovering also depends on the willing buyer and willing seller agreeing upon a price. So, I think that we have seen that iron and steel plants could fetch much better valuation. Similarly, if we take the Essars and the Bhushans, the recovery percentage was much better. Overall, as a pool, our recovery rate under IBC is almost 40%, which is much better than what one would have seen under the SICA and SARFAESI Acts. The value which one can extract through the IBC or the resolution process is also a function of the market. In fact, the IBC has not only created an ecosystem in a short span of 3-4 years, but has also started delivering [results]. Whereas the experience of some developed economies, such as the U.S., is that such a code can have a firm ground only after 10 years. So, to that extent, the IBC has delivered value and plays a very critical role in any emerging economy where capital is in short supply.

What would be the quantum of loans under the IBC process and how much has SBI recovered thus far?

Our recovery has been around 40% of ₹1.5 lakh crore.

To what extent will the bad bank resolve the NPA problem?

Bad bank is a value aggregator. So, all those who have signed the intercreditor agreement (ICA) can have their accounts transferred to the bank through a right price discovery mechanism. Once the NPAs are transferred, the lenders will get 15% in cash and 5% in security receipts (SRs) that be government-guaranteed for four to five years. Once aggregated it will be the IDMC that will try to create value from the assets, including using the Swiss challenge method. [A mechanism where third-party bids will be invited by the bad bank and the highest bidder gets the asset]. That way bad banks will ensure optimisation of value and, secondly, the managerial bandwidth can be put to use for actual developmental work. It is a very positive step and will facilitate resolution at a much faster pace.We will transfer ₹20,000 crore of loans in phases within this fiscal.

Are these term loans or working capital loans?

We haven’t done slicing to that effect, but looked at loans that can be transferred where we have entered into an ICA.

Is this more like testing waters?

That’s right.

Do you see more stress in your loan book considering the state of the economy?

The stress is only in the MSME portfolio owing to blocked receivables and once the economy unlocks, cash flows will be restored. Hence, the ability of MSMEs to bounce back is very strong.

Is there stress in the Mudra loan book as these are unsecured credit largely extended to daily wage earners, who have been the worst hit by the pandemic?

It’s a relatively smaller portfolio of ₹26,000 cr and the NPA is around 20%. In terms of quality it is a challenge but they are covered through the Credit Guarantee Fund Trust for Micro and Small Enterprises.

Emerging Landscape

Do you see growing competition from fintech players?

I’d say it’s an opportunity to collaborate. But I would refer to them as techfins not fintech—they are technology companies offering financial products, whereas we are a financial company leveraging technology. That’s the difference. Since we are embarking upon leveraging technology, we have got a huge opportunity because finance as an industry has to earn trust first because without that we cannot think of managing others’ money. We have earned [that trust] over the past 215 years. So, techfins will have to struggle a little more.

Will public sector banks now have the advantage given that NBFCs are no longer in contention and private banks are having their own issues?

Our market share in deposits is 23% and 20% in advances. We would like to improve our market share, particularly in the retail segment. For example, with a loan book of ₹5.10 lakh crore, we are the largest home loan provider in the country with 33% market share. We have an ambition of scaling it up to ₹7 lakh crore in the next three years.

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