Asset quality remains a concern, says SBI

Poor asset quality has been the biggest concern for the public sector banks in the last many quarters. Country’s largest lender State Bank of India (SBI) has seen Rs 10,800-crore slippage in the first quarter of fiscal year 2013. On account of that, the gross non-performing asset has also increased to Rs 47,000 crore.

In an interview to CNBC-TV18, Diwakar Gupta, managing director and chief financial officer of SBI says asset quality remains a concern at this point. "Coal blocks cancellation will raise concern on many projects," he adds. According to him, slippages have remained high due to external economy. "Concern on slippages around infrastructure projects is justified," he asserts. Below is the edited transcript of Gupta's interview with CNBC-TV18. Q: Do you agree with the markets assessment that asset quality will continue to be a big problem in the subsequent quarters, the reason for which public sector banks such as yours are getting de-rated? A: Asset quality is certainly a concern, it continues to be a concern. How bad will it get is very hard to predict. For example we did not really anticipate the kind of slippage we saw in quarter one. Much of this slippage is because of external economy. We have done a very granular analysis baring a small amount in agriculture and in retail. It is the external economy which is contributing to the current stress. The solutions or the ameliorations also lie outside of the banking space. The market in the mean time is obviously worried and therefore markets react the way they do. They are based on sentiment or expectation. Q: The markets latest worry is that given the very cash flow of infrastructure/power companies compounded by the fact that there is such a lot of policy turbulence which is going on with allocation of coal blocks that sector might begin to pose fresh problems to you which are not linked to what is going on in the world outside as you explained but linked to problems closer home, is that a real threat? A: The concern certainly remains. Today we have about Rs 70,000-80,000 Mega Watts (MW) to come up in the 12th plan and excluding the ultra mega power projects (UMPPs) also there are about 75 projects coming up across several coal blocks. If there is going to be a reallocation or a cancellation of the present allocation there is a going to be a problem. We have 11 such projects in which we have about Rs 7000 crore. The banking sector has about Rs 37,000 crore on them. Obviously fuel linkages come untied and have to be done all over again it puts everything back. The only point I want to make in this is that while status-quo or a stay on proceedings is very good in normal judicial process, for financial justice stay is actually not a stay, it is a disadvantage. So, old policy makers would be aware of the fact that a cancellation is not something which just restores the status-quo and then you have the luxury of doing it all over again. It puts everything back irrevocably because the meter on the money keeps ticking everyday. Q: Are you going to see a lot of stress on asset quality from these specific sectors - mining companies, power companies maybe metal companies which have got a lot of allocation of these blocks which are under dispute today? Do you think these are possibilities? A: This is a macro issue and policy would certainly be very crucial to the health of all these sectors. Mining has already seen stress for about two years. We do hope that policy resolution will see much of the current pain go away. But, it is policy and regulation only which will address the health and vibrancy of these sectors. Q: Are you a little concerned about the kind of ballooning interest cost that we have seen for many of these large infrastructure companies? Even the quarter which has gone by, many companies in the infrastructure space has reported quarterly interest outflows of Rs 400-500 crore. There is genuine worry that their cash flows may not be able to adequately service this kind of interest burden. As the countries largest bank, does that worry you that very soon some of these companies might be knocking on your door with fresh restructuring proposals? A: Whenever we do project appraisal there is a certain amount of sensitivity and cushion built into assumptions. So a quarter, two quarters those are delays that projects can take care of. But, if the delay is two years and credit costs are in the range of 10-14% depending on the project, then 14% doubles the principal in five-five and half years. So, a two delay could render several of these projects unviable and that certainly is a concern if that kind of delay happens. But personally we don’t think that will happen. One or two quarters should see a lot of amelioration. Q: What about agriculture? Your peer bank Punjab National Bank has borne the brunt of the markets apprehension on that – Are you worried about your exposure to the agri sector and whether there can be slippages on that front? A: The percentages look very bad for us. The NPAs in the agriculture sector today are well in excess of 9%. The good thing in agriculture is that it is comparatively lower base. We have slipped about Rs 1900 crore in quarter one of which about Rs 900 crore is on the agriculture cash credit itself. So, they are all large volume low ticket advances. We have 5.3 million farmer accounts at an average ticket size of Rs 62,000. _PAGEBREAK_ Certainly there is a worry and the worry is compounded by the fact that rightly or wrongly sometimes people come to expect that they could get a round of relief. The good thing is that we also have a very strong subvention scheme that the government is running. If somebody adheres to credit disciple he simply gets credit at 4%. We will only hope that it is the latter which will drive credit behaviour rather than the hope of au unfair relief which will affect credit quality, but in the short term that concern is there. At least some of these slippages are because of willful delay in repaying the banks dues. Q: Last time when you communicated to the market after your earnings you did indicate that the additional restructuring in the next couple of quarters would be to the tune of Rs 3,000 crore – I know these numbers are notoriously difficult to predict but going by the trends on the ground is it possible that, that number could be larger? A: We did Rs 564 crore in quarter one. Naturally, that is a number which is signed, sealed and delivered so that comes up in the formal domain only because that restructuring has happened. Today, we have a pipeline which is somewhere between Rs 3,500 crore and Rs 5,000 crore. If the kind of inaction that we have been seeing continues for two more quarters this could be significantly higher. But even the slippages that we saw in quarter one, our chairman has also been clear in stressing that point Rs 2,000 crore to Rs 3,000 crore of the Rs 7450 net addition that we have done is very marginal. It is a temporary cash flow problem. Asset rich cash poor. These assets could come back very-very fast. We are only hoping that the situation will pan out that way. Q: But you must have noted that cash flows are not improving they are actually worsening on the margin, so is what the Chairman said in the realm of hope rather than conviction? A: Ultimately, we all sustain on hope, markets respond to hope. We have got everything going in the Indian economy for things to be back on even keel. We just need some relief in terms of regulation or in terms of policy. There are enough indications to say that people are seized of the matter what else can one do? - These problems are beyond the control of the banking space, often beyond the control of the promoters as well. Q: We are getting GDP number day after tomorrow and seems to be not a like looking number around 5%, your credit growth is linked to that overall number in some senses, are you sensing any sluggishness or continuing sluggishness or any pick up on the margin since we last spoke? A: I don’t think there is a pick up on the margins yet but they are stabilising at the lower level. We lost something on the margin but that was part of conscious policy. We reduced rates on the SMEs and then eventually cut them on the home and auto loans. We still have leeway to protect our margins if necessary, but the State Bank also really would like a lower interest rate regime. We could also do liability side management to protect NIMs because our deposit gathering has been very good. We have gathered about Rs 54,000-55,000 crore of deposits in this financial year. Credit growth is relatively sluggish that should given an opportunity to the banking space to bring down rates and improve margins as time goes by. The problem here is the Rs 4 lakh crore of CDs in the banking space that is hot money. That takes time to unwind and that is what is holding rates from coming down. Fortunately, we don’t have a single rupee of CDs, we have not subscribed to any. As soon as that unwinding happens we should see a lowering of the rates on deposits, which would be good for the sector and borrowers. Q: Whether credit growth is improving on the margin, have you seen any pick up or does it continue to be as sluggish? A: It is sluggish. In fact the pipeline for capex is completely dry. We have seen a growth but the growth is on existing projects. Q: Are you thinking of a lower credit growth number for the full year? Is that number coming down with every passing month? A: As of now, credit growth in the Q1 has been marginally better than the same quarter last year. It’s very hard to predict a trend looking at the numbers. But, looking at the reality on the ground, I don’t think credit growth is going to top 16-16.5%. It should remain under that, unless something dramatic happens. Let us remember that even if sentiment returns, projects return there is leap time before which they convert into fund exposure.