C-Suite chat: Resolving issues around corporate loans is a prolonged process, says B Sriram of SBI

State Bank of India (SBI) is now waging a war against bad loans. Shepherding this task is B Sriram, managing director in charge of corporate banking and international operations. At the corporate banking group, Sriram is quietly tightening the screws on lending, making the bank's loan agreements foolproof so that the companies are disciplined. The other option is to demand a higher interest rates if they deviate from loan agreements. In an interview, Sriram tells Manju AB how the bank is insulating itself from companies who over-borrow, over-stretch and do not pay back.

Q. Despite a record pileup of bad loans (Rs 98,000 crore), the infrastructure loans have grown by 17.08% over the previous year. Where is the growth coming from and is it sustainable in 2016-17? Will you better the growth?
A. We will see comfortable growth. We have already increased our exposure in some of the better-rated discoms (distribution companies), like in Maharashtra. Last financial year growth in the infrastructure loans came from about Rs 33,000 crore extended to the power sector, mainly from public sector undertakings. About Rs 22,000 crore came from services. In the steel sector, where companies were running at just 25% of their capacity, things have improved. After the Minimum Import Price (MIP) has been fixed, capacity has now gone up to 75% and 80 %. In many cases, the MIP is helping the companies protect prices. They have started repaying interest and rephrased the operations. The money is getting monitored closely.

Q. On the large corporate front, NPAs were just Rs 1,510 crore at the end of March, 2015. But in March 2016, they jumped to Rs 20,696 crore. Have mid-corporate loans performed worse?
A. The asset quality review (AQR) of the RBI (Reserve Bank of India) helped throw up many weak and stressed assets. We have also taken some proactive measures to classify some accounts that were not performing. But the recovery efforts are on for all these accounts. Resolving issues surrounding corporate loans is a prolonged process, but we will be resolving many loans as policy issues are taken care of.

Q. What changes will you make in your corporate lending methods? Analysts say that banks do not get credible proposals. So, they are often forced to lend to substandard clients. Is this the case?
A. The takeover of finances is now restricted for companies who are BBB-rated and higher. Earlier, we were taking up lower rated loans also. When the security of a loan is low, then the sanctioning authority will be immediately escalated. We have set up a dynamic rating system that will be triggered the moment there is negative news on the company whether internal or external. For example, when the company is downgraded, an internal bank rating is triggered and the cost of the loans will go up irrespective of the reset clause. The securities will be enhanced. The action will be immediate, unlike earlier times when we were undertaking such an exercise annually and sometimes quarterly. Half Yearly Dynamic Rating has been made applicable for exposures of Rs 10 crore and above in all Business Groups, where there has been some adverse news, and an exposure Rs 500 crore or above is there irrespective of any trigger (adverse news). This is a prudential measure that enables the bank to initiate appropriate precautions against developments that have the potential to seriously impact the health of an account in the future or in the near future.

Q. How do your loan covenants now look? How different is it from a year before?
A. Recently, a comprehensive review of covenants was undertaken and the revised covenants have been classified under Mandatory and Mandatory Negative. The revised set of covenants has been drawn up after much internal deliberation, taking into account feedback from our operating units and our customers. Mandatory Covenants are the basic covenants stipulated for compliance by a borrower. In the case of Mandatory Negative Covenants, the borrower is required to obtain prior approval of the Bank in writing. If the move contemplated by the borrower is not in the interest of the Bank, the Bank will have the right to veto the activity. Should the borrower still go ahead, despite the veto, the Bank shall have the right to recall the loan.

Q. Top ten borrowers take up a substantial portion of the bank's loans. Is there a danger in over-leveraging to certain groups?
A. There is no danger. Now companies have to give us stock statement every 20 days and financial reports have to be submitted at periodic intervals. We have set up a number of technical consultants, sector consultants. The due diligence on loan proposals are also outsourced, so we get feedback from experts. In the context of bank's large exposure, it is necessary to note that in respect of the top 10 groups, five are PSUs. Similarly, among the top 10 companies from the perspective of our exposure, as many as six are PSUs, all of which are AAA-rated. Of the remaining, which are in the private sector, three are AAA-rated while the remaining AA-rated.

Q. What about your exposure to electricity distribution companies? How much of the loans have you converted into bonds and what portion remains on your books?
A. The bank's total exposure to state discoms as on March 2016 is around Rs 15,000 crore. Out of this, about Rs 3,800 crore was eligible to be converted into SDL (State Development Loan) bonds in respect of three accounts. However, out of these three accounts, so far only Uttar Pradesh Power Corporation has approached us for conversion into SDL bonds under UDAY Scheme. We have so far converted around Rs 950 crore into SDL Bonds.

Q. SBI's steel exposure of Rs 82,533 crore has also shown a growth of 2%. Is there a quality demand for credit from the sector? Of this, how much would be in Special Mention Accounts (SMA) II classification?
A. SBI has stated that about Rs 4,299 crore of the steel sector loans are stressed so that is the amount in SMA. Yes, there is a growth of around 2% in steel exposure. This is mainly in highly rated companies. Out of the Rs 4,299 crore, which has been kept under watch list for FY16-17, a portion is in SMA II, while others are showing signs of stress and we feel that there are chances of slippage during the year.

Q. On the corporate lending side, there is a sharp slide of over 33% in your lending to the telecos. In fact, the loans to them have fallen the sharpest. Any particular reason for this? Which sector are you refusing loans besides the telecom sector?
A. We have financed some of the best companies in telecom sector. Reduction in the outstanding in this sector is mainly due to pre-payment of our loans. There is no case of any refusal. We have posted a sector wise watch list during our Annual Results which give an indication of the stress levels. We will consider new exposure depending upon the strength of each case and will closely monitor the cash flows of all our borrowers.

Q. The power sector loans have shown a robust growth. What sort of credit demand is emanating from the sector? Do you see signs of revival?
A. Out of our Rs 1,36,455 crore exposure to the power sector, 50% is to the public sector undertakings. About 100 accounts would be to 200 small power units across the country. About 25% to 30% of our exposure is to the good-rated large companies. But there is stress; that is why we put about Rs 4,000 crore from the power sector on the watch list. With coal linkages in place, many of the units will improve during the financial year.

Q. Is SBI creating a stressed asset fund to lodge its bad loans?
A.We have not yet decided anything on this. However, wherever feasible and possible, we may try to sell some assets through the ARC route.