Burdened by stressed loans, SBI starts seeking divine intervention

India’s largest lender is in a bind. After having knocked on all doors, including the presumably empowered insolvency courts, State Bank of India (SBI) has now fallen on divine intervention in search of resolution.

Chairman Rajnish Kumar said every morning he looks at the sky and prays for the resolution of big accounts that are doing the rounds of insolvency courts. He is quick to add, though, that he is hopeful resolution will happen. “There are many accounts in the final stages of resolution in NCLT,” he explained as reason for his confidence.

Whether Kumar’s prayers will be answered depends on a host of factors. The key is how fast insolvency courts resolve big cases, such as Essar Steel, which have stretched beyond the 270 days stipulated by the Insolvency and Bankruptcy Code. The wheels of 14 insolvency courts are grinding rather slowly on 2,192 insolvency cases, with many of these cases languishing in litigation.

To be sure, SBI has provided for nearly 90% of the large accounts admitted to insolvency courts. That said, future recoveries will be crucial for a whiplash effect on interest income and in bringing down the toxic loan pool.

SBI’s recoveries also rely on peers agreeing to the contours of a resolution plan in cases that are outside the insolvency courts. Inter-creditor agreements facilitate this, but the lender also saw a ₹2,000 crore loan slip into the non-performing category in the June quarter, because its resolution was not implemented in a timely manner by another bank.

Since many of the stressed accounts are still a work-in-progress with regards to resolution, SBI has fallen on its tried-and-tested method to shore up as much insurance as possible through provisioning. The public sector bank had to set aside ₹11,648 crore as provision towards bad loans during the June quarter. In addition, it has provided around ₹2,300 crore towards two large stressed accounts, which includes defaulter Dewan Housing Finance Corp. Ltd.

In cases where provisioning hasn’t been enough, SBI has written loans off. For the June quarter, write-offs amounted to ₹15,482 crore, nearly three times the amount of loans it recovered or upgraded.

Be that as it may, SBI is still facing challenges on asset quality. Slippages surged in the June quarter, thanks to the emerging stress from non-banking financial companies and conglomerates such as the Essel Group.

For stress to reduce on its books, SBI also relies on a recovery in economic activity and the current deepening slowdown isn’t helping the lender at all. It is understandable that Kumar was non-committal on the pace of recovery, and even growth. Loan growth forecast is a modest 12% for the current year, and this hinges on the hope that the busy season in the second half of FY20 will give opportunities.

Meanwhile, investors pushed the stock down nearly 3% on Friday because of the disappointing results. SBI’s net profit missed estimates by a wide margin and even core income left much to be desired.