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SBI chairman Rajnish Kumar
SBI chairman Rajnish Kumar

Amid a pessimistic pandemic narrative, SBI brings a ray of hope

SBI is hopeful of keeping NPAs under control in a year where lenders will see them surging

State Bank of India (SBI) shares jumped 8% on Friday after it reported a historic profit for FY20. The reported profit itself was below the Street’s estimates, but what really got investors excited was the bank’s prognosis on the impact of covid-19.

The larger narrative surrounding the pandemic is that of rising insolvencies. But if SBI’s hope on its own asset quality is anything to go by, the pandemic may not end up debilitating India’s banking sector. “I don’t want to sound overconfident," said Rajnish Kumar, chief of the country’s largest lender, but added that his bank is hopeful of keeping bad assets under check in a year where every lender would invariably see them surging.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

What is behind this optimism?

To start with, SBI has had less than a quarter of its loan book into moratorium, a repayment holiday given by banks to borrowers in lieu of the pandemic.

What’s more is that none of the borrowers under moratorium are big companies. Even small businessmen who availed the relaxation have ended up paying at least one instalment.

Besides, 82% of the bank’s borrowers have paid at least two loan instalments during the moratorium period. The repayment holiday was three months, which has been extended to six months by the regulator.

Sure, the stress on companies and, by extension, their loan repayment capacity is the main anxiety for policymakers and the markets. But Kumar believes that the troubles are not as deep as feared.

But optimism does not mean that SBI will go blind into the crisis without a shield. The lender racked up 11,894 crore in provisions for the March quarter, which is a 45% spike from the previous quarter.

While most banks have been prudent and made provisions higher than the regulatory mandate, SBI went a step further. It has refrained from taking the forbearance on labelling loans as non-performing. For all the pandemic-related relaxations, SBI has made provisions. “We are well-placed to deal with any unusual circumstances," Kumar said in a conference call.

His hope also springs from the fact that the bank has come clean on its balance sheet, providing for every penny of legacy troubles. The lender believes that despite the pandemic, fresh slippages would be contained at 2% of advances in FY21. That is lower than FY17, the worst year SBI has witnessed, when the slippage ratio was 5.78%.

But before investors rejoice, SBI has a caveat. Kumar wants to wait for the moratorium period to conclude, before assessing the potential damage. As such, he expects bad loans to rise from September onwards. The fact that SBI treated all relaxations as potential bad loans and provided for them shows the bank expects pain.

Also, the potential of small retail loans creating a wave of pain cannot be ruled out. That would be overconfidence on Kumar’s part.

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