Recapitalisation of all PSU banks was need of the hour: SBI

Historically, recap bonds have been non-statutory liquidity ratio (SLR) bonds, said Kumar.

SBI will need capital for provisions, especially in the National Company Law Tribunal (NCLT) cases, he further mentioned.

Micro, small and medium enterprises (MSME) lending targets are covered under priority sector lending target, he said.

Below is the verbatim transcript of the interview.

Latha: For you, what are the first takeaways?

A: It is an excellent move, as I said yesterday also that recapitalisation of the banks was the need of the hour and I am very happy that at least the amount of recapitalisation. So it takes into account all the requirements of all the public sector banks and it will be able to take care of not only what I call the risk capital requirement but also growth capital requirement. The central theme of yesterday's announcement is about big focus on employment generation.

Latha: Given our viewers, can you tell us, PSU banks will see a dilution of equity?

A: Yes, if fresh issuance of equity happens then definitely your equity will be expanded. Equity will be expanded because this sub-section will come from the government. So, it should not result into dilution of equity because government will be subscribing to this equity.

Surabhi: How much would you, as SBI, want and what would be the characteristics of these bonds that you would want to see in the fine print? They will not be market tradeable? How would you want the mechanism to work?

A: What will happen that if we go by the previous instances of issuances of such bonds, then one is, definitely they are non-SLR bonds. Although banks desire would be that they are treated as SLR bonds, but that is unlikely to happen because then it has impact on the government finances. On yields of course, there is a possibility that yields will harden as a result of the issuance of these bonds.

So it would also depend that because it is a two-year programme that what is the amount, which will come in this financial year and what will be the amount which will come next year. But the comments which I heard yesterday, a lot of it can be frontloaded also. And that would depend upon the requirement of each bank.

Some banks, which are under prompt corrective action (PCA), they may need more money immediately to comply with the international capital adequacy requirements and some banks which are relatively comfortable as on date, they may need it maybe next financial year. So we will have to do some maths, all of us, all the bank and I am sure that government will also come out with certain formula or guidelines on the basis of which the capital allocation would happen.

Latha: Have they told you anything at all that it will be as it was in the early 1990s?

A: No, whatever I read in the newspapers that recapitalisation bonds.

Latha: You were not consulted on the design? You were not told?

A: No, but this question is not relevant, I would say.

Surabhi: But a ballpark estimate of your capital requirements over the next two years, just to get a sense? Obviously a big chunk is going to SBI, some estimate of that number?

A: As on date, you see that we are well capitalised. We are above what the requirement is. But there is an issue around which needs requirement and depending upon how much provisioning we need taking into account all the asset quality review (AQR) requirements, National Company Law Tribunal (NCLT) cases, how many cases would be referred to NCLT out of the second list. So we will do some more homework before we are able to give some indications that what are our requirements.

Anuj: The Finance Minister also mentioned about the indiscriminate lending that took place over the 2009-2014 phase. Do you get a sense that once the recapitalisation is over - and this is not for SBI but for entire PSU gamut - in that case, the lending will still take time to pick up because there would be that much more scrutiny now?

A: There are two dimensions to it. One is that the internal credit risk management governance structure, that is all the banks, it needs to be improved. But in lending, there are internal factors and there are external factors. On external factors, nobody has any control and that is all the risk assessment is about. When any underwriting decision is taken, there are a lot of uncertainties and it is the credit skill or the risk management skills of the bank which tries to assess those uncertainties.

Latha: Do you expect that the money will come with strings attached that you have to lend to medium micro, small and medium enterprises (MSME)?

A: I do not think so because MSME lending targets, in any case, they are covered under the priority sector. But the steps which have been announced in the budget for the MSME sector are very significant. One of the most significant steps I consider is that all the public sector undertakings; they will be registered on Trade Related Entrepreneurship Assistance and Development Scheme (TREADS). TREADS is where the receivables of the suppliers can be discounted.

And if you look at the MSME sector, the biggest problem always has been that they do not get paid in time and in the process gets squeezed which leads to overdue with the bank and the NPA problem. So because all the headlines are about the recapitalisation and all those things, but the fact of the matter is this step, I would consider being a very historic step and as far as MSME is concerned, it will be a big boost and the asset quality pressure on MSMEs will come down and the cost of financing on TREADS is very competitive. So this is one very significant move as far as MSME financing in this country is concerned.