We are not comfortable with deep haircuts, says Rajnish Kumar

He is known to be a quick decision-maker. Aggressive and fearless, his colleagues say that he leads from the front while taking everyone along with him. As he shepherds India's largest bank at a critical time when resolution of bad loans is leading to a consolidation, many experts consider him to be apt for the role as he has to decide on the kind of haircuts that bidders of stressed corporate assets need to be given. In a free-wheeling interview, Rajnish Kumar, chairman, State Bank of India tells Manju AB that when you have the conviction that the decision has to be taken purely on the merit of the case, then you don't need to fear.

When you took charge as SBI chairman, what made you say that you would come out with course corrective steps within 30 days?

In the last few years we learned a lot about bad assets. Based on this we are improving our risk capturing systems and underwriting practices. We are making sure that when the next investment cycle starts, we do not want to commit the same mistakes.

Did promoters inflate the initial project cost so that they could use bank financing as part of their equity contribution?

In a few cases promoters may have diverted funds. In some cases they may have brought in very little equity. But more than the promoters' thin equity contribution, the escalation in project costs and currency movement led to a lot of stress in the company's balance-sheets, which later hit the banks. Unhedged foreign currency exposures are no longer permitted. One omission that I can definitely say happened is that when the projects were financed, the currency risk was not hedged fully. So when the rupee slipped from Rs 45 to Rs 65 to a dollar, the project economics changed for everyone. Some of the projects in the power sector, particularly where the PPAs were not in place, were financed. This should not have been allowed. When project appraisals are undertaken by the project finance department, then benchmark costs are definitely taken into consideration. If you take the established benchmark in the power sector, then it is about Rs 4 crore per megawatt. That was when the rupee was Rs 44-45 to the dollar. In dollar terms the prices may not have changed. But because the rupee depreciated the price went up substantially, thus escalating the cost.

Did the cancellation of coal mines and the 2G licences accentuate the problem?

Yes, it added to the problems. Take for example the steel sector, where the problem arose due to cancellation of the mines and the cheap imports. Now that the government has stepped in by hiking the import duties on steel, things are looking up for the sector. Some reasons were outside the control of the banks. The cancellation of the mines and non-availability of coal and power to completed projects resulted in the pile up bad loans in certain sectors

The loan covenants look a lot different now?

Financing is now done only if all approvals are in place. Earlier, loan proposals were financed up to 85% of the project cost. Now that has come down to just 70%, excluding the Navratnas or promoters with a proven track record. I think the promoters are also now conscious of the changed scenario due to the Insolvency and Bankruptcy Code (IBC); over-leveraging can be very counterproductive. We ensure that there is sufficient equity in the business so that there is adequate cushion or margin for adverse circumstances. Imported equipment or ECB have to be on a fully hedged basis. Because if the rupee depreciates, the project cost suddenly goes up by 25-30%.

Are you happy with existing NPA resolution mechanisms?

These are, of course, early stages and there are a lot of interpretations around the law. But they are bringing in a lot of discipline in the financial markets. They will also generate a lot of confidence among the creditors. We will have to shed the fear of provisioning. What is the realisable value and the availability of capital with the bank is definitely an issue. Provisioning should not deter the banks from approaching the NCLT.

These mechanisms are leading to deeper haircuts. Are you comfortable with a 75% haircut?

No, I am not comfortable with such deep haircuts. But these are stressed assets where the enterprise value is impacted. So the price will depend much on the sector and its outlook. Most people would go with the discounted cash flow mechanism. So what is the current earning and what are the future earnings. Once you discount that, you arrive at a value, and then there is a replacement value.

Will 60% discount be a norm if not more?

No, I don't think 60% haircut would be a norm. I would say the reverse. On a portfolio basis, we should be able to recover about 55% to 60% in certain sectors. So the haircut will be about 40% to 45% on an average at a portfolio level. In some individual cases, it could be higher or lower. We have had cases with a 100% or more settlement.

Is IBC going to lead to a consolidation as it looks like most of the assets are going to be gobbled up by a few rich promoters?

There will be consolidation, but we cannot help it. We need strong promoters. If you don't have too many strong promoters, what can you do? There will be three or four large players who will dominate any sector, which is the case everywhere in the world. Only promoters with deep pockets can take over these assets. They have the capital to pay off the financial creditors while also investing on the capex.

With fewer companies won't big banks like SBI run the risk of breaching exposure limits?

In some cases, we may breach the norm in the short run when we are facilitating the financing. But this will not be the scenario in the long term. We will follow our prudential exposure norms, which are stricter than the RBI's norms. We look at ratings and if the credit rating is weak, we cut down our financing to the group even if we have room under the exposure limits norm. Our top ten borrowers only account for one quarter of our loan book. For certain groups, this may be higher, but the loan book will continue to be diversified.

You sold off a factory in Naini as a young field officer despite stiff opposition from the local mafia?

Those were early days. There were senior officials, and as a field officer, I was also there. I have never had fear in life. I have worked in such areas which are not considered to be good in terms of law and order. We finally tackled it through negotiations. We managed to sell the factory even at the cost of making the local mafia unhappy. I had to be present throughout the operations. It was tension filled not only for me but also for the other people who were with me.

So is that experience helping you tackle this cycle of bad loans?

Experiences in life are important. But this cycle of bad loans is totally different. I have never been afraid to take decisions. Honestly, in so many years of my handling corporate credit, there was no pressure on me to take a particular decision. I am quite accessible to anyone and listen to both the parties. Finally, we have to take a decision keeping the best interest of the bank in mind after assessing the risk associated with the proposal. In banking you cannot avoid taking calculated risks.