SBI chief Arundhati Bhattacharya declares war on bad loans

 

Mumbai: When she was a village branch manager in eastern India, she was quick to grab a screwdriver to fix power outages. Now, as the most-powerful woman in Indian finance, Arundhati Bhattacharya must tackle the highest bad-loan ratio among India’s 10-largest banks.                                         

Appointed in October as the first female chairman and most-senior executive officer of the country’s largest lender, State Bank of India Bhattacharya has been combing through balance sheets riddled with Rs.67,800 crore of bad debt. Some 5.7% of total loans at the 207-year-old behemoth are non-performing, the highest level in at least eight years, the earliest date for which data are available, exchange filings show.

The war on bad loans continues, Bhattacharya, 57, said in a 14 February interview in Mumbai after SBI reported a bigger decline in third-quarter profit than estimated. “I have no magic wand to make the non-performing assets go away. We have to work through the pain to fight the issue.”

India’s slowing economy and the highest borrowing costs among Asia’s largest nations are eroding debtors’ capacity to repay loans. The ability of companies to generate cash and service debt is at the lowest level in five years, said Deep Narayan Mukherjee, a Mumbai-based director at India Ratings and Research, a unit of Fitch Ratings Ltd.

A failure to curb sour debt would drag further on the lender’s earnings and share price, which has slumped by almost one-third in the past year. SBI’s return on equity, which measures profit generated with investors’ funds, is poised to end the bank’s business year on 31 March at the lowest level since 1999.

Stock sales

SBI raised Rs.10,000 crore in January from selling shares to the government and institutional investors, and needs another Rs.70,000 crore by March 2018 to comply with Basel III rules, according to Bhattacharya.

The fundraising lifted SBI’s capital adequacy ratio, a gauge of financial strength, to 12.8%, the bank said in a 30 January statement, exceeding the 12% level the government wants state-controlled banks to maintain. The national average was 12.7% as of September, according to RBI data.

Banks failing to curtail soured loans will have to strengthen their capital buffers against defaults, the central bank said in a January statement. Lenders that are able to quickly restructure bad debts owed to multiple lenders will receive better regulatory treatment such as being allowed to spread losses from distressed assets over two years, it said.

 

Banks’ challenge

“The erosion in capital buffers and profitability due to rising bad loans is a challenge for most state-run banks in India,” said Vibha Batra, New Delhi-based co-head of financial-industry ratings at Icra Ltd, the local unit of Moody’s Investors Service. “SBI is not different.”

SBI shares have dropped 31% over the past year, to Rs.1,510.50, dragging the bank’s valuation to 0.8 times book value, an estimate of the worth of its assets. That compares with 0.6 times for the CNX PSU Bank Index, which tracks 12 government lenders including SBI, and the BSE Sensex’s multiple of 2.5, data compiled by Bloomberg show.

Net income at the lender fell 34% in the three months ended 31 December to Rs.2,230 crore, the lowest in nine quarters, as provisions for defaults rose 24%, SBI reported on 14 February. Return on equity slumped to 11% in the nine months to 31 December from 17.7% a year earlier. Reporting the same ROE for the business year that ends next month would be the lowest level since March 1999.

Part of what’s needed to improve SBI’s performance may remain outside Bhattacharya’s control. India’s economy is set to grow at 4.9% in the year to 31 March, compared with a decade-low 4.5% the previous year, the statistics ministry said in a report this month.

“It will help if India’s economy revives,” Bhattacharya said. “If the growth doesn’t pick up, the situation will become more difficult. But we will keep doing what we can to minimize the pain.” 

AKANKSHA SHANU

PGDM 1st year.