The Reserve Bank of India has approved the proposal to allow telecos use spectrum as collateral and garner funds from banks for the upcoming auctions.
Santosh Nayar, Deputy MD Corporate Banking, State Bank of India (SBI) told CNBC-TV18, this move will aid banks to sell their spectrum in case there is a default. However, spectrum alone will not encourage banks to lend cash flow would also be considered.
The country's largest public sector lender doesn't have any non performing asset (NPA) in the telecom sector neither there have been defaults, he informed.
"All the loans which we have given are to large well known corporates against their group guarantees. We have no problem. There is not a single NPA in the telecom sector and in the 2G sector in this bank or for any other banking system," he elaborated.
Meanwhile, CNBC-TV18 also learns that restructuring of state electricity board (SEB) loans are being discussed by the government, where 50% of bank's exposure to SEBs will be assumed by state government and the rest will get converted into bonds.
These steps will contribute to healthier SEBs, but for banks cash flow is all that matters, Nayar said.
"We need to see whether SEBs have sufficient cash flow to meet their normal expenditure, investment upgradation. After all that whether there is enough money left to pay the loan, interest coverage and installments. If that is there then definitely there is no problem looking at the lending," he elaborated.
Below is the edited transcript of Nayar’s interview with CNBC-TV18. Also watch the accompanying videos.
Q: The ability to use spectrum as collateral, how does that change things? Does it make it easier and more willing on the part of banks to lend to telecom companies?
A: It is a positive because we have been discussing this with DoT for quite some time. Earlier there was some regulation which said that we could not get a charge on the spectrum. With the current development it will be possible for the banks to sell their spectrum in case there is a default.
But spectrum alone will not encourage banks to lend, because ultimately it will deepen the cash flows. We will have to see what is the price they pay for the spectrum and what is the revenue model they will have to build up, whether the economy can bear that kind of cost, so ultimately it all depends on that.
Q: Will you able to go back on the loans that you all have given to telecom companies so far? There was a lot of controversy when loans were given with license as collateral. Some questions were raised by the judiciary. Of course we didn’t get to hear any rules. But what about loans already given, especially to parties whose licenses have been cancelled? Are you seeing default over there? Can you renegotiate any of those loans?
A: For all the loans given by the banks, the judiciary has not pointed out any such issues. All of it has been cleared. Banks have lent as per the existing policy. All the loans which we have given are to large well known corporates against their group guarantees. We have no problem. There is not a single NPA in the telecom sector and in the 2G sector in this bank or for any other banking system.
So, these corporates have the ability to raise cash elsewhere and pay. The only thing what happens is since they have invested money in this 2G rollouts they would have taken money from other group businesses and those businesses could come under some sort of strain. From the loans already sanctioned and signed it will be difficult for us to change the terms of sanctions.
Q: If this possibility of mortgaging airwaves does comes through and there is a default situation that emerges, what would be the scenario then? How exactly would it be feasible in terms of the bank to then re-auction the process? We do understand that the excess amount will then have to be given back to the government? Could you take us through the modalities in case there is a default?
A: I wouldn’t be able to comment on that at this stage because we will have to examine what is the legal position when the license itself has to be cancelled, does the company have the right to spectrum. Secondly, when the spectrum was not pledged or mortgaged at that time whether the banks can go back and link the spectrum to the license. All these issues will have to be examined. We won’t be able to comment on this at this stage. But we are not facing any default situations, so we don’t have any worry on that account.
Q: We understand the auction is to be by August 31. When exactly you think you will start actually giving out loans to telecom companies?
A: I wouldn’t be able to comment on that because everybody is working on it to meet the deadline and let us hope it happens fast.
Q: We understand that the proposal which went from the Chaturvedi Committee to the government is that 50% of bank exposure to SEBs will now be assumed by the state governments. The balance 50% is going to get converted into bonds and that opens up exposure limits for banks and they will be now able to lend for working capital requirements. Is this a pleasant state of things for you since at least 50% is going to be paid up hopefully by the state governments? Will that also enable you and will it make you willing to lend to SEBs?
A: It will be definitely pleasant if there is additional support coming from the government. If any form of restructuring has been done definitely it will be much better for lenders. The willingness of the lenders will depend on how the restructuring is carried out. Ultimately, for the lender it is the cash flow which matters.
We need to see whether the electricity boards have the sufficient cash flow to meet their normal expenditure, investment upgradation. After all that whether there is enough money left to pay the loan, interest coverage and installments. If that is there then definitely there is no problem looking at the lending. So, some of the electricity boards which are faster, quicker off the mark will be able to raise money from the banks.
Q: What you are saying is that you will lend only to those state electricity distribution companies which have audited results and where the income is more than expenses? You will not proceed with this tripartite agreements and MoUs and not avail of the State Government money in cases where you don’t see healthy SEBs?
A: All these steps which the government is proposing will contribute to healthier SEBs, but banks will have to see what that translates into numbers. Since we are bankers we look at numbers.
Q: In FY13 give us a sense in terms of where exactly would you be possibly most cautious in terms of fresh lending in order to prevent any sort of further deterioration in asset quality?
A: Yes, for example imported coal. In power projects where there is an imported coal being used under there is a pass-through it will be very difficult for the banks to lend anymore. Second issue is in the construction industry.
In construction industry we are experiencing that there is a lot of slowdown in payments this year from the private sector or even from the public sector and from some of the state governments. So construction industries have come under sizable stress.
Q: How is loan growth at SBI? Is it comparable to what it was in the same quarter last year?
A: First quarter has been good, but this is mostly in the cash credit and in the demand loan side. But, if you look at the projects in pipeline there is definitely a fall compared to last year.
Q: How do you think the year might pan out? Do you think you will do less than what you did last year?
A: We will at least be able to do the same as last year. It depends on how aggressive we are in the business. But it is difficult because there is slowdown in the pipeline.
Q: What about NPLs? The GDP indicates that fourth quarter was a very bad quarter and the industrial output IIP number for the current quarter is indicating that the slowdown is continuing. Are you seeing that reflected in the form of higher NPLs, because last quarter you have reported lower NPLs? Which is the trend now? Is the slowdown taking hold and are NPLs increasing?
A: NPLs are not increasing. We have managed to get things under control primarily due to the efforts we have taken. You must understand that there is a difference in the retail and wholesale NPL scenario. In retail we control our processes and the efforts we take. We react immediately to the warning signals that help a lot and the restructuring we have done in our module sector etc.
In the wholesale a lot of it also depends on the outside environment. For example, if in mining there is a problem sealing industry and everybody else is affected. Imported coal is not allowed, the power project is affected. So a lot of things are not within the control of the lenders, it also depends on the outside environment.
Q: Net-net what will be the NPLs in this quarter?
A: We will be almost same, we have got things under control but in the long run if the things don’t improve, if the investment climate doesn’t improve there could be continuous pressure, which means we will have to redouble our efforts.
Because definitely there is a slowdown in the cash flow which the corporates are reporting. The large corporates are delaying the payments to the smaller units; electricity boards have delayed the payments. We have had number of cases where accounts have become NPA those who were supplying to electricity boards and did not get payment in time.
Q: Could you live us with some perspective with regards to what you are expecting on Monday from RBI and whether you would be able to pass on rates to customers because the SBI management has been quite vocal in basically what they want from RBI in terms of what they expect is a CRR cut?
A: One must understand that the CRR cut will have material difference on the rates. On a total DTL of Rs 60 lakh crore, 1% cut would translate to about Rs 60,000 crore. At an average yield of 10%, it translates to about Rs 6,000 crore to the banking system. Even if banks bring down the rate slightly they would be able to protect their interest margins.
Q: RBI has given a 125 basis point CRR Cut from January till now, your base rates in BPLRs have not gone down, and you have only cut selectively for some sectors, now if 50 basis comes, will you pass it on?
A: That is because our base rate was already lower, we had kept our base rate much lower than most of the banks. We are already passing on our benefits even without getting it primarily due to our CASA and our lower cost deposits management.