ARC sales one of the options to recover loans: SBI

Latha: I just want to know, do you have any targets in terms of asset sales? Should we expect that in the June quarter, we should be able to see the June to September quarter, we should see a substantial recovery number for SBI?

A: To answer your question about any target for sale to asset reconstruction companies (ARC), my response would be that the strategy is around recovery and resolution of non-performing assets (NPA). And when you have a strategy and resolution of NPAs, it depends upon the circumstances of each case, whether to go for restructuring, rehabilitation, one time settlement, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) action, Debts Recovery Tribunal (DRT) and of course, sale to ARCs is also one of the option, but it is never set as a target or it is not the first option.

Latha: I am asking you if there is some guidance you can give in terms of recovery that you will make in the June-September quarter?

A: All those numbers are being compiled and once they are compiled, they will come in public domain and everybody would know that.

Latha: Can we get a general sense of how the non-performing loans (NPL), gross NPL and the restructured asset number will move in the next quarter, that is the current July-September quarter. A lot of companies have been refinanced under the 5:25 scheme. Is that going to improve your gross NPL numbers and what about the restructured assets? What is the percentage of restructured assets that may fall to NPL?

A: as I said that for giving any numbers, it may not be possible, but to again answer your question about 5:25 scheme, the financing under that scheme and the impact on NPL and provisioning, one is we need to delink 5:25 refinancing from the NPL, because the 5:25 scheme is applicable to infrastructure financing and for loans above Rs 500 crore, where the loan is from the banking system above Rs 500 crore. And the asset classification at the time of refinancing, it is allowed to be continued or retained. If it is a standard asset, it will be a standard. But if you do a 5:25 scheme for a NPA, then that NPA can be upgraded only after observing the performance for one year as per the RBI rules.

So, the scheme does not immediately impact your NPL or provisioning, but what it does is that the re alignment of the repayment applications with the cash flow generation capacity of the project happens. And to that extent the stress on the companies which have invested in infrastructure or they come under core industries, to that extent some relief in the initial years towards repayment obligations is available. And to that extent it will help in reducing the stress on the system.

Sonia: Although you cannot give us numbers, can you just throw some colour on what the situation is as far as the power sector is concerned because over there the problems seem to be piling up, especially with the banks that have an exposure to the state electricity boards (SEB)? Do you think the power sector NPAs could worsen in the quarters to come?

A: Power sector, the NPA position may not worsen in my assessment because even though the State distribution companies (discoms) and many of them are not in the best of the health, but still they have to buy the electricity and they have to pay for it. Only thing is that if there is a power plant or a unit where the cost of production is very high, then their ability to sell the power, if there is no long-term power purchase agreement (PPA), then that gets affected. But, that is only a temporary problem. And even the merchant rates for power, they have gone up recently. So, I do not see that there is an immediate threat, but the stress in the system continues and that stress is coming mostly on account of non-availability of long-term PPA. But, in one of my interactions earlier also, I had mentioned that that capacity does not exceed above 7,000-8,000 megawatt as far as our internal statistics is concerned where there is an issue around long-term PPA.

Latha: We heard that the banking secretary has written to the steel secretary asking for some sops for steel companies, easier availability of iron ore and more importantly a higher anti-dumping duty. Will that help some of the steel companies from slipping into NPLs?

A: Your presumption always is that everything is slipping into NPLs. That is not the situation, but yes, steel, we know worldwide, the commodity prices are down, the consumption in China which is the largest producer of steel and which has 700 million capacity, their consumption is down, that is putting pressure worldwide on the steel prices and India is no exception. As far as action by the government is concerned, all the governments worldwide, they do provide some sort of protection to their domestic industry. Be it USA, be it Canada, be it Europe. So, India is no exception and I am sure whatever needs to be done within the framework of the law and within the framework and we have so many free trade agreements (FTA), which I have read today that they are also under review. So, whatever needs to be done from the government’s side, I am sure by following the, under their international obligations, they will do whatever best can be done.

And as far as the industry is concerned, they will also have to look at their factors of production. Their cost efficiency, production efficiency, leveraging. So, it is the government, it is the industry, it is the banks, it has to be a consolidated action. And on the top of it, the improvement in demand must happen for the steel sector to improve margins. Right now, it is not that they are not earnings before interest, taxes, depreciation and amortization (EBITDA) positive. Many units are EBITDA positive, but maybe some are over-leveraged and because of over-leveraging, EBITDA earnings are not enough to service the interest. Their deleveraging will have to be done and the plants which are integrated from end to end, meaning thereby they have iron ore mines, coal mines and produce value added products or they are present across the entire chain. So, they should be able to meet the competition.

Latha: So, your short point is that you will be able to report lower NPLs in the current quarter?

A: Again, you are coming to the right question. Effort is towards that because entire management from top to bottom, middle level, everybody is working hard on recovery and resolution of NPAs. We have seen some positive impacts and results in the past and going forward also, whatever is within the control of the management to recover and resolve, there all those efforts are on and if within the little bit of help from improvement in the macro-economic environment, I am sure, not only State Bank, but the banking industry as a whole should start showing better results.

Latha: Are you expecting the performance bonus? Apparently, you have richened to set aside three percent of your profits for performance bonus?

A: That is something which our CDO can answer. But, if it is improved, it will be sort of a good step for public sector banks and whether that will apply to me or not because I am managing director and governed by different service rules. So, that we will see.