Mumbai: State Bank of India (SBI) will mitigate risk on its agriculture portfolio by buying insurance cover for all crop loans.
The nation’s largest lender, which had almost doubled bad assets in farm loans in fiscal 2011, will link the crop loans to crop insurance.
“Delinquencies will be in crop failure. In that case, crop insurance will take care of the losses,” chairman Pratip Chaudhuri said in an interview with Bloomberg UTV for Banker’s Trust programme.
The bank will also call an analyst meet in a week for a “threadbare discussion” on its dismal fourth quarter earning—a sort of soul searching exercise on what went wrong and why.
It had provided for bad loans, home loans and employees’ pension; as a result, SBI posted a Rs 21 crore profit in its fourth quarter against analysts’ expectation of Rs 3,000 crore.
The stock tanked 17% at a stretch, wiping out more than Rs 28,000 crore of investors’ worth—between 17 May, the day result was declared, and 26 May—before recovering marginally. On Monday, SBI stock rose 0.07% to close at Rs 2,236.
The proposed meeting with analysts, Chaudhuri expects, will restore confidence of the investor community, and reassure them that the weak fourth quarter earning was a one-off phenomenon.
The share of bad debts accruing from agriculture was Rs 4,524 crore, or 18% of the total non-performing assets (NPAs), or bad debts, in fiscal 2011.
The total farm loan portfolio of SBI rose 21.18% to Rs 94,826 crore in fiscal 2011 out of which 6.37% has turned bad. This is sharply up from last year’s 3.66%.
“We did not expect this,” said Chaudhuri.
“NPA in agriculture is a problem area for SBI. If they link their agri-portfolio to crop insurance and get money for crop failure related delinquencies, it solves SBI’s problem to a great extent; but it all depends on what kind of premium they will have to pay,” said Hatim Broachwala, analyst with Mumbai-based domestic brokerage Fortune Financials.
The bank has also drawn down close to Rs 8,000 crore from its reserves to set aside money to pay employee pensions.
Chaudhuri defended the move to erode its core capital.
“It is not by choice that we dipped into the reserves,” he said, adding that the bank’s operating profit was not enough to set aside the provision from. If the bank would have done that, it could have “distorted all important ratios,” Chaudhuri said.
According to the chairman, SBI is readying for an introspection of its key segments and business parameters in a bid to deal with a few critical issues such as an unprecedented rise in its NPAs, especially from farm sector, and a fall in its NIM (net interest margin) in the fourth quarter.
Sequentially, the NIM, a key parameter of profitability, fell close to 0.50% to 3.07%.
The analysts’ meet assumes importance because SBI is readying to raise capital through a Rs 20,000 crore rights issue.
Chaudhuri said being the “flagship bank” of the government, the nod for the issue will not be a problem for the bank to secure, especially when the government has given such a nod to all the other banks.
“For the government, SBI has a special place,” Chaudhuri said confidently.
Since fiscal 2009, in the wake of the global meltdown, SBI has restructured assets worth Rs 34,349 crore, close to 15% of which has turned bad so far.
Some analysts expect bad debts to rise as much as 30%.
However, the SBI chief said he is confident that recovery will not be hampered. “Restructured loans are backed by securities. The companies are cash-poor but asset-rich. Where the underlying assets are healthy, we don’t expect any deterioration in asset quality.”
“Besides, they (the restructured firms) are not fly-by-night operators,” Chaudhuri said.
Chaudhuri wants the bank’s credit growth to moderate between 16% and 17%,from 18-20% earlier, and deposits to grow at 21%.
“Our CD (credit-deposit) ratio is already at 76%. This will lend some semblance of balance,” Chaudhuri said.
The banking regulator had earlier criticized banks for high CD ratios as that makes asset liability management a challenge and may turn into a systemic risk.
Bloomberg UTV will telecast Banker’s Trust on Thursday at 7.30pm.