Provisions seem to be dogging the State Bank of India (SBI); either there?s too much of it or too little. In a major clean-up act at the end of the last financial year, India?s biggest bank chose to take the full hit of pension costs, gratuity and also loan losses in one shot. The bank had a new chairman in Pratip Chaudhuri, who decided the dust couldn?t be swept under the carpet any more. Neither did he want frequent run-ins with the regulator, having realised that the central bank will always have its way. So, although it meant hurting both the bottom line and the balance sheet, Chaudhuri didn?t hesitate to take the necessary steps; the bank routed nearly R8,000 crore through the reserves for pensions and around R4,000 crore through the P&L for loan losses and teaser loans. That left just R21 crore of net profits for a bank that had been turning in 100 times the amount!
This time around, the bank?s net profits have come in at R2,890, above what the Street had been expecting. But loan losses seem to have risen sharply?gross NPAs for the bank are at a high 4.2%, the highest in five quarters and up 70 basis points sequentially. Net NPAs have crossed 2%, up 40 basis points sequentially, and again the highest in several quarters. One would have thought the bank needed to have set aside more by way of provisions since the environment may not improve in a hurry.
Loan loss provisions at R2,921 crore for the September quarter are up about 5% sequentially. The bank argues that although the asset quality has been challenging and there is stress, the provision coverage ratio is close to 64% and believes recoveries will pick up, especially in the agricultural sector, given the good harvest. Moreover, SBI hasn?t lent too much to dodgy clients like SEBs?the total exposure is less than R10,000 crore. But the fresh NPLs of R8,000 crore are disturbing and the somewhat reckless lending of the past is coming home to roost. While it is the best judge, it?s a tad surprising that the management believes that that slippages may be behind the system. In times like these, it?s probably best to be cautious even with restructured loans, even though it may be true that the restructured portfolio of R35,422 crore isn?t all lost. After all, there are slippages even in restructured portfolios and so it may have been nonetheless prudent to earmark some more money towards provisions; in this difficult environment, that may have been appreciated even if it meant profits were smaller for a couple of quarters. In fact, in early October this year, Moody?s downgraded SBI financial strength rating or stand-alone rating, to D+ from C- on lower tier-1 and asset quality worries. The capital wasn?t providing sufficient comfort in the event of potential higher credit costs, the rating agency said adding it was uncomfortable with SBI?s low tier-1 capital of 7.6% at the end of June, which it felt was hindering loan growth.
Of course, it?s not the bank?s fault if it doesn?t have enough capital; it has had to live with an irresponsible government that has failed to provide it with the necessary capital to grow. SBI?s tier-1 capital at the end of September was 7.5%, although profits for the first part of the year haven?t been taken into account. Indeed, life is never easy for the SBI top management, with the finance ministry constantly carping about something or the other but the bank must do what it feels best. Unfortunately, SBI has been saddled with accounts like those of Kingfisher Airlines, although the exposure to Air India isn?t as large. And there must be many more corporate customers that the bank has serviced under pressure. At a time when the economy is slowing it may be a good idea to hunker down a little, even if means sacrificing some profits in the short term. It?s not margins that matter so much now as the asset quality, because the loans to the small and mid-sized corporates are a worry. The good news is that the bank has a great liability franchise with almost half of its resources coming from cheap current and savings accounts; clearly given that it can leverage both its reach and pedigree, it will not be compelled to compete aggressively for savings accounts. Even it it does need to increase the interest rate on savings bank accounts, to hold on to market share, it wouldn?t really push up the cost of funds significantly. So, it can afford to pick and choose its customers, which it must now do with much greater care. Once the environment improves, it can go for the kill.
shobhana.subramanian@expressindia.com