SBI expects 50% recovery from RBI’S 1st list of bad loan accounts Lenders may start IBC proceedings against four power producers

Bank hopes to recover 35% from 28 others: Rajnish Kumar

MUMBAI: State Bank of India (SBI) expects to recover half of the assets that turned sour in the initial 12 large bad loan accounts that were identified for bankruptcy resolution, chairman Rajnish Kumar said.

“The recoveries will be around 50% and most banks are holding provisions in excess of 50%. It may differ from bank to bank, but at SBI, our estimate is that we will be able to write back part of the provisions if everything goes well,” Kumar said in an interview on Tuesday.

Barring one, all the accounts are in various stages of resolution at different benches of the National Company Law Tribunal (NCLT). At the time of referring these high-value non-performing assets (NPAS) to the insolvency court—the new platform that India created following the Insolvency and Bankruptcy Code (IBC) being put in place in May 2016 —they accounted for 25% of then ₹8 lakh crore bad assets in the Indian banking system. Since then, the pile of bad assets has swelled to ₹10.3 lakh crore as of March 31.

For the 28 bad accounts that were subsequently identified by the Reserve Bank of India (RBI) for resolution, Kumar expects the recoveries to be less—in the range of 30-35%. Even then, SBI will be able to write back some provisions as it has already set aside money to cover 76% of these NPAS. This will, in turn, add to its profit. Unlike a few of his predecessors at SBI who had promised time and again that the “worst is over” on the bad loan front—and such statements were typically followed by a further expansion of bad assets—kumar is cautious in commenting on the state of NPAS at the nation’s largest bank. “People don’t believe when you say that the worst is over. We have to prove now that the worst is over. So wait for next two-three quarters,” he said.

According to him, the bad loan recognition process is over and NPAS peaked in March 2018; every year, the banking system will add fresh NPAS, but they will be “within the tolerance level”. The current credit cost will also be “within the tolerance level and will progressively reduce”, he added.

He is also seeing signs of investment demand recovery. “I don’t have (a) pipeline of investments in (the) private sector. But there is huge investment happening in the roads sector,” he said. SBI is projecting a 10% credit growth for the current fiscal year and is looking for a mix of 60% retail assets and 40% corporate assets. Till July 6, there has been a 12.8% credit growth for the industry, against 5.7% in the year-ago period.

Overdependence on government regulations and under-recoveries from end-consumers are the chief reasons for the massive debt pile-up in India’s “regulated” sectors, said Kumar. The RBI’S financial stability report in June—a biannual health card of India’s financial system—has projected gross NPAS of the industry crossing 12% or, in the worst-case scenario, 13% by March 2019, from a little over 11% in March 2018.

According to Kumar, reliance on government concessions in highly regulated sectors such as power, roads and telecom has mainly led to the souring of loans. At the same time, he also held his own community responsible, cit- ing poor underwriting and risk management by bankers.

“We cannot have over-leveraging in the system any more. The appraisal and underwriting standards are undergoing a huge change. But there is a greater realization about payment discipline as well as the equity from promoters,” he said.

“For regulated sectors, I would say external factors are 70% responsible for the bad loans and internal factors (banks’ inability to appreciate risks) 30%. For other sectors, it would be 50:50,” he said.

Citing the example of the power sector, Kumar said that even though there have been attempts to turn around power distribution companies, things have not worked “as expected”. He further added that the power sector firms are likely to grapple with severe “cash flow issues” once admitted for insolvency proceedings since their power purchase and fuel supply agreements are likely to be terminated on being declared insolvent. This is why, he said, the lenders are trying to resolve a few power sector assets outside the NCLT. According to recently available data, NPAS in India’s power sector stood at ₹37,941 crore.

Commenting on the suitability of the IBC across sectors and assets, Kumar said that for certain sectors, “it should be left to the commercial decision of lenders on what approach they want to take.” In case of engineering, procurement and construction sectors, he suggested that for the distressed firms, a possibility of arrangement with the existing borrowers can be explored to complete the projects and derive a certain value as the underlying assets in the sector are not great. MUMBAI: Lenders are likely to initiate bankruptcy proceedings against GMR Chhattisgarh Energy Ltd (GCEL), Ind-barath Energy (Utkal) Ltd, Lanco Anpara Power Ltd and Jindal India Thermal Power Ltd ( JITPL), two people directly aware of the development said on Tuesday.

The decision to refer the four power producers to the National Company Law Tribunal ( NCLT) follows unsuccessful talks between lenders, comprising both public and private banks, and potential buyers due to mismatches in valuations, said the people on condition of anonymity.

“Lenders have in principle decided to take the companies to NCLT but would continue to engage with their financial sponsors for a favourable solution,” said one of the people cited above.

The person said Axis Bank is likely to file for bankruptcy against GCEL, while IDBI Bank and Punjab National Bank are likely to move NCLT against Lanco Anpara, JITPL and Utkal.

Axis Bank, PNB and IDBI Bank didn’t respond to emailed queries. GMR Group, Lanco Group, B.C. Jindal Group and Ind-barath group also didn’t immediately respond to emailed queries.