SBI tackles the problem

Largest lender's guidance on NPAs is clear but ambitious

State Bank of India (SBI) recorded a historically high quarterly loss in January-March 2017-18, according to the results released last week. The loss, of Rs 77.18 billion, meant that the bank made a full-year loss of Rs 45.56 billion. The main cause of the loss was provisioning for non-performing assets, which jumped more than 100 per cent to over Rs 240 billion. The ratio of the bank’s gross non-performing assets now stands at almost 11 per cent, and the total amount is a Rs 2.2 trillion — a significant proportion of national lending. The scale of the loss was considerably worse than the estimated Rs 20 billion; however, the markets rewarded the bank for what they saw as clear guidance, and the stock price of SBI rose appreciably. The firm approach that the Reserve Bank of India has taken to the recognition of bad loans has, in most eyes, meant that there are a few more bad surprises to be dealt with and that SBI is now on the up-curve in terms of asset quality. Given the truth of that assumption, the bank needs to be commended for having tackled the problem head-on and prepared for a revival in business. 

The bank’s guidance is clear but ambitious. It relies on bringing the gross NPA ratio in the ongoing financial year to below 6 per cent. This would require not just firm action on existing NPAs, but also lending as normal. This is a bet not just on the banks’ actions, but also on the health of the overall macro-economy. For loan growth to revive in India’s major lender, the recovery in growth will have to be sustained, and private investment will have to pick up. There is also considerable hope that the Insolvency and Bankruptcy Code (IBC) will help deal with non-performing assets as expeditiously as possible. This would mean that some proportion of that Rs 2.2 trillion would return to the bank’s balance sheet in good time. However, the truth of this assumption will be borne out only by subsequent events. The IBC process continues to have some gaps, and determining timelines and recovery rates is still a work in progress. Even given SBI’s good intentions, there are several other moving parts that the government will need to keep stock of if the banking sector, of which SBI’s performance is the leading indicator, is to recover. 

The rest of the state-controlled banking sector would do well to learn from SBI’s open and transparent approach to its NPA problem. A straightforward description of the scale of the problem, together with guidance as to how the NPA ratio is to be reduced, is key to building confidence. Some other large public sector banks, such as Punjab National Bank — which posted a record Rs 134.17 billion loss in the fourth quarter of 2017-18 — have unfortunately not followed this approach. Transparency and clarity should be the watchword for banks if the sector is to survive this time of turbulence with minimum damage.