Have communicated our claim to PNB with regards to Nirav Modi fraud: SBI

Kumar is confident that PNB and other banks will sort out Nirav Modi case.

Talking about business, he said we expect gross slippage ratio to be at 2 percent for FY19.

Non-performing asset (NPA) recognition will be upfront in March quarter, added Kumar.

On recovery front, he said we see much better recovery from stressed accounts in power sector.

We do not expect March quarter to be good for the banks, Kumar further mentioned.

Below is the verbatim transcript of the interview:

Latha: Starting with PNB unfortunately. Are the contours of the problem clear? It is only Rs 11,400 or is it that all of you have gone back and looked at your links with the industry and should we be prepared for any bad news, any other things that may go NPA?

A: I think PNB is in a much better position to give the exact number but as far as our exposure is concerned on PNB, that number is very much confirmed, calculated and advised to PNB and our exposure on one of the companies Gitanjali Gems has also been crystalised and there was no issue around that. So our numbers, our claim is clear but because there are some secondary market purchases, so double counting has to be avoided and that’s why only PNB can give you a confirmation.

Latha: I agree. In PNB what we have got is Rs 11,400 crore odd of one kind of exposure and another Rs 1,700 crore exposure to Gitanjali. So we are working with something like Rs 13,000 crore. My question is that are there other diamond companies either because of follow-on effect or because all banks have gone and done a thorough search. Should we expect that there will be other either wrong cases of lending or manufactured letters of undertaking (LoUs) without a credit memo. Any such problems are they likely to emerge, after all the Indian Banks' Association (IBA) met over this issue?

A: I do not think so. It seems to be a case confined to a particular branch of PNB. At least for SBI I can confirm that there is no such issue, no such problem and I am sure by now all other banks have also would have reviewed their portfolio and would have arrived at a similar conclusion because if something was wrong somewhere, by now I presume it would have come out.

Latha: The other thing that has come from the Reserve Bank of India (RBI). I believe circulars are telling banks that they have to connect their Society for Worldwide Interbank Financial Telecommunication (SWIFT) communication system to the core banking system in cases where they are not, I know you are not involved. Any other instruction from the regulator on this?

A: No other than whatever they have said about the safety of the SWIFT and controls which needs to be in place. Therefore, nothing else we have heard as of now.

Latha: Deadline of April is possible to do. It is not very difficult for the entire banking system to comply?

A: Very much.

Latha: Has the regulator or the government or PNB itself decided who will pay that Rs 11,400 crore. When we last heard there were still some argument between PNB on one side and other bankers?

A: I am confident that things will get sorted out between PNB and other banks.

Latha: You are expecting them to pay you?

A: That is my expectation.

Latha: But the government or RBI have not come out with anything. They have not intervened?

A: Not to my knowledge.

Latha: Coming to the other big problem which is hurting all banks, all corporate facing banks is that February 12th circular of the RBI on NPA resolution. What according to you is the impact on your bank itself? Should we see some of the strategic debt restructuring (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A) cases getting recognised as NPA either this quarter or next?

A: Definitely but in any case the accounts which will be recognized as NPA, they were very much on the radar even before the circular came and the impact in our case, we have estimated, is not going to be as large. In my earnings call I had indicated that what would be our gross slippages which we had said around 2 percent in next year – that is not going to change much. Whatever recognition we have to do we will do….

Latha: All those stressed cases are included?

A: Yes, all such cases are included and whatever recognition we have to do we will do in March quarter because RBI guidelines and circular is very clear that no divergence or any such thing will now be tolerated or accepted. So all banks will have to be very cautious that they recognise the asset as impaired in time and as per regulatory guidelines. Therefore, what I had said for the sake of reiteration that our estimates of what will be our NPA are very much available. The only thing is that they cannot be uniformly spread across the quarters. So in quarter you may see elevated number and in the other you may see much less number – that is all but the major recognition has already happened and as a result of these guidelines whatever is remaining that will happen for SBI in March.

Latha: They have given you six months for cases over Rs 2,000 crore to either be resolved or taken to National Company Law Tribunal (NCLT). So should we expect something in the first quarter or are you going to advance even that recognition?

A: Recognition will happen as per the norms which is 90 days. As per this circular the definitions are very clear, they were clear also. What circular says is that as soon as any term loan installment is missed even for a day, principal or interest, so at that stage you start thinking and the date of reference start from there, March 1st or for other accounts as and when it comes in Special Mention Account (SMA) zero and for Rs 2,000 crore and above exposures, the meter, if I call it, it is starts from that date rather than waiting for the account to become SMA 2 or NPA. So that is the only thing and six months is the outer limit. If we feel that resolution is not possible or we have to ultimately refer to NCLT and outside NCLT, resolution is not working out, so it can be referred earlier also.

Latha: To come to the earlier part of your answer that if a loan is missed on 31st day itself, you have to start taking action. Do you think this entire process that has been set in while it is very healthy perhaps in the long run might also lead to some acceleration of NPA recognition?

A: Yes that will happen, but as I said the NPA recognition happens on 90th day and that has not changed. So if an installment is missed, principal or interest, for a day the account straightaway doesn’t get into a NPA category. The only thing is that your action plan should start early and immediately why the installment has been missed. If it is just a temporary one time problem once in a year, I do not think any major issue but if it is happening repeatedly, for example then definitely it should be a cause for concern and the intent is that if the problem is recognised early, the possibility of resolution is very much there before things become too late. So to that extent I do not think that it will have any impact on the NPA recognition because 90 days norm still remains; the only thing is you are advancing the action much earlier to the account become NPA.

Latha: For the system as a whole, do I understand you right, anything that is S4A or SDR is NPA as of this quarter?

A: May not be necessary because if we decide on SDR, for example in January and there is a default of 15 days then it will become NPA in April, 90 days overdue. So it is not NPA on March 31st; it becomes NPA in the first quarter but the only thing is the standstill which was available, will not be available anymore and any resolution plan whether in NCLT or outside NCLT, the account will be classified as substandard in the first instance and you have to provide.

Latha: The final question on this issue, the 5:25, I was last given to understand that banker have asked IBA to clarify from RBI whether 5:25 is going to be reinstituted at all. Is that plea being made to the RBI and more importantly what happens to cases where you have already given 5:25? They will come after every five year for a reset, nothing happens to that classification. Does it?

A: I think that is clarification which IBA will take from RBI but if you ask for my opinion or view in the matter, 5:25 worldwide is the norm for financing of the infrastructure projects because infrastructure loan cannot be paid in 10-12 years. So hereafter whatever project loans you give they will be all under this dispensation where you reset the terms, spreads, interest at the pre decided frequency and amortisation is depending upon the concession or the life of the project. So amortisation has to be for a longer period as far as the project loans go and I do not see anything wrong in that that is the position we always maintained earlier also and it should not be at least going forward for the new loans, it is not a restructuring. For old loans there may be a debate because you had earlier asked for 10 year period and now it is under 5:25, but I think whatever has been implemented has been implemented. Whatever has not been implemented will get impacted by the new guidelines. That is my understanding of the situation but we will wait for RBI clarification.

Latha: You have a new guidance for provisioning, for credit cost?

A: No, I had said that for March ’18 I am not giving any guidance. As I said that we will be much more upfront in providing and recognising whatever remaining is there and next year gross slippages at 2 percent and provisioning also 2 percent. Therefore, I do not think there is going to be any major change in that – that is my assessment of the current situation after analyzing all the large accounts in detail.

Prashant: Two part question, before this entire PNB episode happened there was a general belief in the banking ecosystem that maybe the worst in terms of NPAs etc. even NPAs coming to light and then being recognised etc., that is behind us. With this new circle or RBI circular are you confident that we are on that path. We should think about this entire process in the same way that things have been recognised, resolution is underway. That is one and second, the circular puts the onus of resolution on the bankruptcy code. Are we putting too much pressure on bankruptcy code itself because it will also be tested, right? Some of the large cases will have to be credibly settled, they will appeal in the Supreme Court. How do you see that getting established, the efficacy being established?

A: To answer your question, PNB’s case is more in operational risk and not a credit risk. Whatever has gone wrong, it is about the weakness in the operational risk management – that we have to keep segregated from the credit risk. Credit risk as I said that after March ‘17 review also and the recognition part of all the NPAs up to March ‘17 has taken place, wherever there have been divergences, divergences have been declared and going forward the new circular has come. So in certain cases where standstill was available, cases of SDR or S4A, so that standstill will not be available. So these accounts will get recognised as NPA after 90 days delinquency. The action plan to correct that will start on day zero. As I said whoever misses one installment by one day or two days, we have to think what is going wrong or what resolution is needed.

To answer your question on insolvency and bankruptcy code – that is the only way forward; the law will evolve, the processes will evolve but internationally and globally any capital system to succeed, you have to have a strong bankruptcy process and law and only then the cleanup of the system can happen. So effort would be that in those cases were matters can be resolved and are expected to give better result than the insolvency process then banks will go for that process. If that process is likely to result into a sub-optimal recovery as compared to expected recovery in NCLT then we go for NCLT. So there will be a choice what to do and that will all depend on whatever is the best resolution in the assessment of the lenders.

Ekta: A question which is news based. Oriental Bank of Commerce (OBC) is in news today and is down in double digits on fears that there is a fraud which has emerged in Simbhaoli Sugars. Do you know if you have exposure to that company in particular?

A: We may be having some small exposure but not a very large exposure that I am sure.

Ekta: One follow-up question, you did mentioned that post the RBI circular that came out on February 12th, whatever incremental recognition would be needed would be done in March quarter which is in Q4. So are we looking or is there a possibility that maybe the numbers could probably be another loss this quarter because of higher provision figure based on gross NPA recognition, based on the RBI circular?

A: At this stage I would not like to make any guess because our internal calculations are still going on but when we talk about the quarterly performance, one big element which we will have to be mindful of, the increase in the yield where mark to market provisions will hit most of the banks and how much that will be is still not known but that is one factor more than the provision which will impact the performance of all the banks and not SBI alone but we have the largest treasury so impact on us also is always more than others.

Latha: Now you may have a fair assessment of how much of haircuts maybe needed in the first 12?

A: The bids have yet not come, they are still away but the banks have provided almost 60 percent; 50 percent was mandatory. So the gap in provisioning may not be very large and that’s my assessment of the situation and particularly because steel accounts which constitute a large chuck, there the resolution plans which have come, so that gives me the hope that on an average basis we may not be much of the mark and if there is even some shortfall that will not be very significant if we have already provided 60 percent.

Latha: And for the balance 28 that went into NCLT in December. What are the likely haircuts?

A: In the second list also, in SBI we are holding more than 60 percent provision but they would be smaller accounts. So the recovery chances in bigger accounts of steel there the recovery has been much better because of the turnaround in the scenario. For midsized accounts, the recovery may not be as high but 60-65 percent provision maybe just adequate and if there is any gap, it will not be as significant because the amount involved itself will be much smaller than NCLT one list which had some very large exposures. So recovery in the NCLT one list is very crucial for us.

Latha: Power – we heard that NTPC put out a tender to buy and a lot of banks put in stressed assets when NTPC agreed to buy. What is your sense that you may end up in terms of a stress in the power sector – gas based and thermal. Are we likely to see more NPA recognition there?

A: Gas based, I think all accounts would have been recognised by now as NPA. Luckily for SBI we didn’t have many exposure except in one and that in any case is owned by NTPC and GAIL India. So other than that we did not have any gas based exposure but power sector yes, if there is any sale of the asset as of now there may be some losses even in that portfolio but power sector, if we are able to hold on for some time like steel, I see much better recoveries in power sector because the price on the exchange itself is showing an upward trend and summers are still away.

Latha: Where are you on the capital position? Is there enough left for growth because there are these accelerated provisioning coming in?

A: We are alright as far as capital is concerned. All the ratios are much above the regulatory requirement. So at least SBI we are in a position to fund the growth and whatever capital government has provided – Rs 8,800 crore which will come in, so that we are just giving a side for the growth and not using for provisioning or anything because our ratios are much high.

Latha: But what about the industry because as soon as the February 12th circular came out, a lot of brokerages thought that Rs 2.11 lakh crore is going to be completely inadequate for the system. A lot of people were calling for exactly 50 percent more at least one lakh crore more of capital. What would be your numbers?

A: I think it is an overestimate. Rs 2.11 lakh crore is a bit number and in the first year only about 50 percent has come, so 50 percent more is available and going forward for all the banks because SBI always is the mirror. Therefore, I have a feeling that March ’18 will not be good for the banks but next year onward the gross slippages as well as the credit cost will start coming down. So there will be some internal accruals available apart from the remaining amount of the capital which government will infuse. So, somehow I am never so pessimist as other people are.