SBI wages war on wilful defaulters

SBI classified 274 companies as wilful defaulters in the year ended 31 March,
 after pushing 383 into that category in the previous fiscal. Photo: Hemant Mishra/Mint
Live Mint ; Dineshunnikrishnan :Mon, Apr 08 2013. 11 36 PM IST
Lender sharing names with RBI, Cibil; plans to publish photographs of the promoters of these firms in newspapers

Mumbai: State Bank of India (SBI), the nation’s largest lender, is clamping down on wilful defaulters—companies that have failed to repay loans even though they have the capacity to make payments.

SBI, which controls about 20% of the total assets of the country’sRs.75 trillion banking system, classified 274 companies as wilful defaulters in the year ended 31 March, after pushing 383 into that category in the previous fiscal. With this, 657 companies that have defaulted on loans worth Rs.5,700 crore have been branded wilful defaulters in the past two years. About 60% of the defaulters are mid-size corporate firms with an average loan size of Rs.60-70 crore.

SBI began compiling the wilful defaulters’ list in 1999. It has 1,124 borrowers on the list, with Rs.7,315 crore of loans.

Besides sharing the names of the wilful defaulters with the Reserve Bank of India (RBI) and Credit Information Bureau (India) Ltd (Cibil), SBI also plans to publish the photographs of the promoters of the companies in leading newspapers.

Once an entity is classified as a wilful defaulter, the company and its promoters are barred from raising money from other financial institutions. They are also prohibited from floating new ventures for five years.

A bank can classify a firm as a wilful defaulter when the repayment doesn’t happen even when the firm has the capacity to honour the obligations, when money is diverted or siphoned off or the firm disposes of the assets against which the loans were taken, according to RBI norms.

“People cannot take the system for a ride,” said A. Krishnakumar, managing director of SBI. “There will be no compromise in dealing with such parties.”

In March, the government had sent a strong message to the promoters of debt-laden companies that do not repay despite having the means. “We cannot have an affluent promoter and a sick company,” finance minister P. Chidambaram had said.

“This will be a wake-up call for the whole banking sector,” said Abhishek Kothari, an analyst at Violet Arch Securities Pvt. Ltd. “This will be a strong warning for companies who misuse bank money, and an inspiration to other banks to take bold steps on wilful defaulters.”

SBI is the hardest hit by loan defaults among Indian banks. Its gross non-performing assets (NPAs) rose to Rs.53,457 crore, or 5.3% of its loans. In percentage terms, Central Bank of India has higher bad loans (5.64%), but in absolute terms, its gross bad loans are Rs.8,938 crore.

Chronic bad debt

SBI’s stressed assets management (SAM) division, which handles high-value chronic NPAs, plans to steer the recovery process more aggressively, said Soundara Kumar, deputy managing director at SBI. Kumar heads the division, consisting of 15 SAM branches.

Bad loans from SBI’s different business units are moved to SAM when the asset quality worsens.

The quantum of bad debt moved to the SAM division rose to Rs.20,000 crore in fiscal 2013 from Rs.17,000 crore in the previous year. Of the Rs.20,000 crore, about Rs.8,000 crore has been written off.

Aided by the recent amendment in the debt recovery Act, SBI has started bidding in bad assets auctions to scuttle any attempts of cartelization, said Kumar. The bank itself makes bids for such assets to keep fake buyers at bay who cartelize to keep the price low. In recent months, SBI has conducted two such auctions.

If an auction process fails twice, the bank sells such assets through a private treaty, after identifying a buyer.

“We are actively focusing on monitoring to ensure that recovery of assets is done in a time-bound manner,” Kumar said. “The bank is willing to settle such cases through a one-time payment, provided there is no haircut (sacrifice).”

SBI is also encouraging stake sales in companies that have defaulted in clearing bank dues, but are functional. In one such case, Uttam Galva Steels Ltd bought a stake in Lloyds Steel Industries Ltd.

To cut bad debt, SBI plans to sell Rs.150-200 crore of loans to asset reconstruction companies in the current fiscal if it gets the right price, Kumar said. This will be the first time SBI is selling bad loans in the past three years.

Since December, the bank has set up teams of senior officers who have been contacting borrowers for the recovery of bad loans. “About 700-1,000 officers across the country are deployed in such teams. The results are positive as we have seen substantial recovery in the last few months,” Krishnakumar said.

Indian banks are battling bad debt on their books in the face of declining economic growth, projected to grow at the slowest pace in a decade at 5% in the year ended 31 March, clearance delays and high interest rates, which have hampered the ability of borrowers to repay debt.

Bad loans eat into the profits of banks as they need to set aside money for such assets.

Typically, banks try to restructure loans once signs of stress emerge in a high-value loan. This is because banks need to provide a lesser amount for restructured advances compared with what they need to mark for bad loans.

The banking system has so far restructured assets worth about Rs.4 trillion. Analysts expect at least 25-30% of restructured loans to turn bad as the banking regulator’s ability to cut the interest rate is limited due to high inflation and widening current account deficit.

Since April, the Indian central bank has cut its repo rate, at which it lends short-term funds to banks, thrice by a total 100 basis points. A basis point in one-hundredth of a percentage point.

“Both the NPAs and restructured loans are likely to continue in the next few quarters as the overall slowdown persists. But if banks take a cue from SBI and boost efforts to recover bad debts, that can be a big positive for the entire sector,” said Kothari of Violet Arch.

(This story has been modified to reflect the correct designation of Soundara Kumar.)