Reserve Bank Governor Raghuram Rajan on Monday said the central bank is ready to give banks more flexibility in restructuring of stressed loans if it facilitates recovery of stalled projects.
While this move is expected to combat the alarming issue of bad loans or non-performing assets (NPAs), P Pradeep Kumar, managing director - Corporate Banking, State Bank of India says the 5:25 rule will help gravely if the RBI were to take existing underconstruction projects too under the ambit of stalled projects.
Kumar says this move will help refinance the existing projects, thereby reliving some stress and it is likely to aid stalled projects in the power, roads and steel sector.
An estimated Rs 20 trillion worth of projects are stuck at various stages for want of land, or environmental clearances or other regulatory or public approvals. As of April-June this fiscal, bad loans, including those recast ones, have crossed 10.4 percent of the total assets.
Below is the verbatim transcript of P Pradeep Kumar's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: What exactly is the request banks have made to the Reserve Bank of India (RBI)? Is to apply that 5:25 rule, which is now available for new infrastructure projects for old projects, what have you all asked the RBI?
A: RBI has now permitted the use of the 5:25 for new project sanction after the issue of this circular. Also they have said, refinancing 5:25 in case of projects where commercial operation date (COD) has been completed and we are able to induct new financial institutions up to 25 percent of the loan amount, we can refinance over a longer period. We have been requesting RBI that this has to be applicable to existing projects under construction because they are also in a similar situation that they may not have cash flows to repay in a shorter period of time and this 25-year loan period or loans up to 80 percent of the economic life of the project as applicable to projects which have been completed should be applicable to projects under construction, that is the request we have made and if RBI is considering it, we will be extremely happy.
Sonia: If the RBI takes up these requests then what could be the impact be on the non-performing assets (NPAs)?
A: It is very difficult to say what the RBI guidelines will be. I don’t think it is hazardous for me to guess, what will be the impact the NPAs but yes, we can release stress if the RBI gives their approval for refinancing projects under construction.
Latha: Obviously the RBI governor has come with a warning that in the past the restructuring was misused therefore we will watch very closely. In your opinion how many projects are there which -- what percentage of your own infrastructure book is under the kind of stress that can be relieved by this 5:25 rule, by extending a five year loan to them?
A: There are many projects still under construction and they have been facing some roadblocks, some delays and of course in some cases there are things like coal blocks de-allocation. The impact of all this is very difficult to say how it is going to affect their cash flows, we will have to wait for the coal block auctions also to happen. In some cases I think if RBI allows us to refinance the existing loan, certainly it will help relieve the stress especially in some large power companies.
Latha: Does it relieve future stress only or will even current already declared NPLs or restructured book, more importantly, will not slip into NPLs?
A: Wherever we have restructured as per corporate debt restructure (CDR) is only for 15 years or even outside CDR, the maximum tenure of the loan is 15 years. If RBI permits for a longer 25 year period, certainly it will relieve stress but I do not know whether RBI will allow us to classify the existing restructured account after we do a refinance as standard. I am not very sure what guidelines will come, we will have to wait and see. It would be better to react after the guidelines come.
Sonia: As far as the bank itself is concerned, there has been quite a bit of relief as far as the impairment formation ratio goes. In the quarter gone by, we saw it decline to 4 percent. Do you expect the situation to improve further going ahead?
A: Situation has improved but improved very slowly. I don’t think there will be any dramatic change, there is still stress. So I believe that slippage ratio will come down very slowly. But I don’t expect any dramatic improvement.
Latha: So you might end the year also with around the current gross NPL percentage of 4.2 percent?
A: Very difficult to hazard a guess. Hopefully it will be less than this.
Latha: The RBI has also said that even when people start defaulting in the first month and the second month, these loans should be classified as special mention accounts SMA1 loan and SMA2 loan, what is the progress on this project? Is it reducing incremental NPLs, is it underway at least?
A: The new RBI guidelines are underway and as soon as the account is classified as SMA2, we have to call for Joint Lenders’ Forum (JLF) and the JLFs are decided on a corrective action plan. This is happening to an extent, some borrowers feel now that the NPA date is not 90 days, it is 60 days, many borrowers do not want to be classified as SMA2 so there is pressure on those companies to stay away from SMA2, that way that is good and even if they fall on SMA2 because of the formation of JLF and the corrective action plan being carried out immediately. I think there will be less stress in the future.
Sonia: Can you give us an update on what is happening as far as Bhushan Steel is concerned? We understand there are some news reports, which suggest that the creditors have asked Bhushan Steel to sell their Odisha plant, which is the most profitable asset. Has SBI been one of the creditors that has asked Bhushan Steel to sell their plant?
A: SBI is one of the creditors. We are having continuous discussions with the company but I would not like to reveal what the nature of the discussions are right now.
Latha: Standard asset?
A: Yes, it is a standard asset.
Latha: What is exactly your exposure to the Adani Group?
A: I don’t have the figures right now maybe Rs 18,000-19,000 crore.
Latha: It has not breached the limits that are already in place for you all, is there?
A: No, there is no breach of limit. It is all well within the prudential limits.
Latha: You don’t worry about the very high debt to EBITDA of groups like these?
A: Wherever there is a high debt to EBITDA, it is a source of worry. Adani has a problem especially in their Mundra Power plant regarding the tariffs. Some movement is there, I hope it will get settled in the next couple of months, that will improve -- the EBITDA is expected to improve. Last year they had some trading losses on the coal trading, that has also adversely affected their EBITDA. Hopefully, this year, the first two quarters for the trading company has been good though EBITDAs are expected to improve and if the impasse regarding the tariffs in Mundra are resolved, I am sure the debt to EBITDA ratio is expected to come down substantially this year.
Latha: If the RBI indeed allows banks to refinance existing underconstruction projects as you called them, which sector benefits most?
A: I think the two sectors that will benefit most are obviously power and roads and maybe we can look at also certain steel projects.
Latha: Finally when do you see bad loans troughing or have they already troughed?
A: I don’t think that is troughed, there is still some pressure, maybe another two quarters.
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