It's not been an easy one-and-a-half years for Pratip Chaudhuri. In his very first quarter as the chairman of the country's largest bank, State Bank of India (SBI), he took a 99 per cent hit in profits. And, in the past year, whenever he has interacted with the media, he has either fielded questions about Kingfisher's debt status or burgeoning non-performing assets (NPAs).
Chaudhuri has been at the helm of affairs during one of the toughest phases of the bank. With the economy navigating rough seas, the bank's NPAs have been rising consistently.
Big names like Kingfisher Airlines, Deccan Chronicle, GTL Infra and a number of others - where SBI has had exposure - have gone into corporate debt restructuring. And, the list is only growing. There is no respite in agricultural loans as well. Slippages have increased at the bank, ratcheting up its pain. While the rise in NPAs seems small due to the sheer size of the bank, SBI definitely has begun to show signs of stress because of them.
Analysts say the core profitability of the bank remains strong, but that it is bearing the burden of the economic downswing. "SBI, in some ways, is a victim of circumstances. There has been deterioration of asset quality of all public sector banks (PSBs) compared to private sector ones because the latter have had a more retail focus. With things turning bad for the corporate sector, PSBs have suffered more," says a banking analyst.
Recently, Enam Securities met the SBI management and listed some key takeaways: Since credit growth continues to be flat, net interest margins are likely to be under pressure in the second quarter and stressed assets will remain high - not a pretty picture by any standards.
The management, however, defends itself staunchly.
S Vishwanathan, the newly appointed managing director (mid-corporate), says, "We do not recast loans just for rollover. There is stress in the system and many corporate loans were restructured. But, our portfolio continues to be robust."
He said that while the slowdown has stretched, during the boom years when the economy was galloping along, many Indian companies ramped up operations with bank funding. For example, in the hotel sectors, banks gave loans for seven- to eight-year periods.
However, due to delays in commissioning and lower traffic than projected, many firms have come with requests to increase the repayment period, especially areas like textiles, iron & steel and aviation, which are under severe stress.
Sub-par monsoons have not helped either. The delayed rains impacted the payments in the first quarter. The outstanding amount in Kisan Credit Card accounts increased, as farmers found it tough to make repayments due to financial strain. But, things could improve, as the Rabi season is likely to be better.
Senior PSU bankers empathise with SBI's situation. A senior official with Punjab National Bank says, "While SBI is facing severe strain from bad loans and an economic slowdown, it will benefit from increase in credit demand in the second quarter due to its lower rate of interest - something it can maintain because of lower cost of funds than other public sector banks."
Even brokerages are quick to point out the cost advantage of SBI. An analyst with Motilal Oswal says the strong traction in current account-savings account and fall in bulk deposit rates will keep a check on the cost of funds. "But, it would be offset by the impact on yields, as the bank has reduced lending rates in specific segments. Its margins are expected to remain stable," adds the analyst.
The banking behemoth has begun to see the benefits of lending rate cuts. "We have greatly benefited by rate cutting because now the growth is coming in the retail segment, which is rate-sensitive and ever since we have dropped our home loan rate, our daily sanctions have almost tripled," says a senior SBI official involved in retail business.
Home loan sanctions used to be Rs 65 crore. Now, they are at about Rs 150 crore per day for SBI. This is a secure portfolio with low risk of defaults, the official points out.
While the perils of the downturn continue to be real, more worrying are the slippages. The slippages in the first quarter were beyond the bank's estimates. The strain in mid-corporate and the higher end of small enterprises remained due to the economic slowdown. Gross NPAs rose sharply in three months to Rs 47,156 crore in June 2012 from Rs 39,676 crore in March 2012 - a rise of Rs 7,480 crore sequentially.
The slippages ratio is 15-20 per cent from the total restructured portfolio. The total restructured loan portfolio stood at Rs 36,904 crore at end of June 2012. The share of standard assets was about Rs 29,532 crore, with textile leading the pack. The restructured books had assets worth Rs 7,373 crore which were bad loans.
The Motilal Oswal analyst says slippages might decline on a quarter-over-quarter basis. But, they will still remain at an elevated level. The improvement in upgrades (of loans) and recoveries will be critical. Restructuring is likely to increase sequentially partly due to systemic restructuring.
Enam expects the slippage to continue in the same vein. It expects the second-quarter slippage to be another Rs 7,000 crore. It also expects stressed assets to be higher. "The management stated there are no signs of improvement at the ground level and slippages are mainly emanating from the SME (small and medium enterprise) and mid-corporate segment. Going forward, the bank expects a revival in capital markets and some reforms getting implemented, leading to improvement in asset quality," said the Enam report.
The bank is taking steps. Soundara Kumar, deputy managing director & group executive (stressed assets management) at SBI, says slippages were less in the fourth quarter (March 2012) as there was intense focus on monitoring and recoveries for FY12. Even payments of the Kisan Vikas Patra outstandings are taking place. The pace of restructuring in the second quarter has moderated. The size of loans per account referred for recast is coming down.
Another senior SBI official says, "The bank has turned very careful about corporate accounts which are showing signs of stress. There is a shift in stance. On doubts over irregularity, we begin investigative audits and in some cases, have ordered forensic audits."
The country's largest bank is facing a serious challenge on several fronts. But, unlike predecessor O P Bhatt, who had made the 'elephant dance', Chaudhuri has to ensure that this elephant stands tall in bad times.