Cannot rule out haircut on loans to larger projects: SBI

Diwakar Gupta, MD & CFO of State Bank of India (SBI) says a three-year delay for an infrastructure project could be lead to it becoming "completely unviable".  "We need some measures to ensure that clearances that are not coming through do come," he told CNBC-TV18 in an interview.

According to sources in the finance ministry, the government is worried about the developing non-performing loans (NPL) situation, which they say could shoot up by a further Rs 3 lakh crore in the next six-eight months. Sources say the ministries have not realised the seriousness of the situation, which can be averted by giving some long-overdue clearances and permits to infra projects.
Gupta said the proposed National Investment Board (NIB) may prove to be a gamechanger for faster project clearances. “We need to privatize transmission and distribution in power sector,” he said.
We cannot rule out haircut on loans to larger projects, Gupta said. Below is an edited transcript of the interview on CNBC-TV18. Q: At the moment what is the NPL situation? I think Rs 1.5 lakh crore – restructured asset is about Rs 1.6 lakh crore. What we are talking is a doubling of stressed assets—NPL plus restructured plus Rs 3 lakh crore—would mean Rs 6 lakh crore in the system.
A: I must caveat whatever I am going to say now by an initial comment that fortunately State Bank of India (SBI) is well placed in this whole thing. We have about Rs 1 lakh crore worth of sanctions on the power side but our exposures are mainly to the PSUs or to the large corporate who are anyway servicing. I do not think we have a very major concern in the next six-eight-12 months.
But now going to the substantive issues, which you summed up, the fact is that we are at 12 or 14 percent per annum debt, a three-year delay can kill a project. It can become completely unviable and the fact therefore is that we need some measures to ensure that clearances that are not coming through do come. On the power side it’s the usual thing, the transmission company has to put up towers. We need environmental clearance, we need forest clearance, we need right of way. Same is true for roads. For example, on the Soma Isolux highway, I believe just 4-5 km is yet to be acquired but that’s been three years.
The crux of the matter is to have some kind of a fast-track arrangement where we will be able to debottleneck 5 percent bottlenecks, which are holding up 95 percent of the projects. Otherwise, two-three years of delays makes the project unviable. Obviously then somebody has to then take a hit before it comes on-stream. Q: Just to take that point forward which you mentioned with regards to fast track of approvals. There is the national investment board which is being considered seriously. According to you would that be a game changer if it does come through and how crucial is it at this point in time considering that infrastructure is the majority in terms of the NPA or bad asset problem?
A: Anything that is able to fast-track the decisioning, which is stuck up, is great. To that extent the NIB is also going to be a very welcome step. The question only is how much of these issues NIB will be able to decide on and how much of it will still be in a legal wrangle. In which case, we need some kind of a fast tracking even of the legal process.
Land acquisition is typically mired in legal controversies. And then we need somebody who will be hearing cases on a day to day basis and disposing them off in 1-3 months. That is important. Q: It is very revealing what you are saying by way of road blocks. Many of them are in legal quagmire and then there is gas issue, which is stuck for altogether different reasons. A lot of projects expected that Reliance will scale up from 80 mmscmd to maybe 120 and thereabouts. It’s scaled down to 20 mmscmd. So that is another issue altogether and then there would be many in which there will be state governments involved. So what can the NIB do for instance in the right of way. So are you personally hopeful of the NIB sorting out this Rs 3 lakh crore at least half of them?
A: I wouldn’t be able to put a finger on the numbers but I am sure NIB is going to be a game changer as you said because the very fact that the apex level of the government people give a certain ruling binds people to then respect it to some extent and the other point you made is about state government. So control is not just at the legal process delay but also the fact that there is a concurrent set of people who rule on the same issues including state governments.
_PAGEBREAK_ Q: I just wanted to focus on incremental lending because there are lots of private banks, which met with a lot of analyst over the quarter. They mentioned that because of the stress that they are seeing in terms of asset quality they have sort of reined in fresh lending towards infrastructure. Would you share that view at this point in time, would incremental lending be a little reined in or more cautious?
A: Incremental lending will be reined in not because the current environment is tough but because one must see the light at the end of the tunnel. So, for example in Delhi both Tata and Reliance were not allowed to raise fares by the regulator for eight years and the banks continued to fund those losses. Now, how long will the banks do it? So if clarity on that issue is not there why would anybody come up and put incremental capacity in that area or in that product.
The same thing is true let us say for roads, the same thing is true in respect of PPAs. Generation has been privatized but we need to go the last mile on transmission and distribution also being privatized. Now in Bhiwandi for example Torrent has brought down T&D losses from 61% to 16% and that makes the whole operation so much more viable. You are preventing pilferages, you are increasing revenues, you are enhancing viability and that needs to happen all the way through. Q: I wanted to take up two phrases that you used and they are two separate questions: You said that SBI has been lending only to big corporate's and they have been servicing their loans but the point is we are talking only big corporate's these days when we talk about CDRs and defaults – Kingfisher, Deccan Chronicle, now Lanco downgraded by Crisil to level D in terms of the bank facilities. Now, even if a corporate is servicing it loans, if the date of commencement is well over two years anyway it will be marked as NPL isn’t it, is that kind of stress a problem that you envisage?
A: No definitely that is a challenge and if you would have I am sure you would have noticed our Chairman Pratip Chaudhuri has highlighted this question in the past and taken it up also with Reserve Bank saying that the COD parameter for classifying the debt is non performing is not really an international benchmark and given the fact that most of the time these delays are really not in the promoters hands it’s a double whammy for the promoter that this also comes in to his detriment and we need to relook at this provision. I am sure Reserve Bank in its own wisdom would be examining it. Q: I had a huge argument with RBI officials, I mean I was educating myself when I post that COD issue to them not 24 hours ago and they seem pretty firm that they want to stick with the COD as a parameter to continue because their fear is that even if you service the loan, as you said in three years if you are paying 14% more and your project is not producing anything then the chances of it becoming completely non-viable and at one stage becoming a bigger burden on the system is very high. So, from a systemic risk point of view at the moment they are not willing to let go that parameter. The other issue that I wanted to take up with you is, exactly what you said, in three years a project could become unviable if it doesn’t start after getting ready and then you said someone has to take a haircut, someone has to take a hit. Do you think that the banking system is heading to the 2003 like situation where all of you took a hit on the steel plants? Remember the joint package for Essar, Ispat and Jindal, something like that, a haircut which you guys will take?
A: You cannot completely rule out a haircut on earnings. Principal may not be compromised but debt could need to be restructured at lower levels of effective interest rates and to that extent earnings would be impacted for the banks in general. Q: I had another question which was more focused with regards to the likes of say something which is happening on Deccan Chronicle as well Kingfisher which is economic viability of a business at this point in time. Not in terms of project commencement being delayed but just simple economic viability of revenues and demand and supply not matching can you just give us a sense in terms of whether you are seeing more corporate’s going down that road and whether you would see more stress in terms of asset quality within economic un-viability of businesses?
A: No, economic un-viability can also happen for a variety of reasons. In the case of Kingfisher it is about operations which are expensive and costs are not getting recovered. In the case of Deccan Chronicle the issues are all together different and we know what the issues are. At the end of the day viability has to be established in order for there to be a long-term relationship and for banks to back a project.
But viability can also come in through several ways which includes infusion of equity not just write down of debt so if the enabling environment is conducive to a new partner coming in economic viability can get restored. Where we have really gone down the road very fast in the case of Kingfisher it is for the whole system to ensure that we are creating the right kind of environment where a potential new partner would find it valuable to join.