Loan recovery still a challenge for state-run banks
State-run banks are pushing officials to do door-to-door recovery, employing call centres for follow-up action
India’s state-owned banks, which control three-fourths of the assets of the Rs.83 trillion local banking industry, are finding it difficult to recover their money from defaulting borrowers although mounting bad loans put pressure on their capital base and threaten their ability to grow in a tight competitive environment.
“It is like putting toothpaste back into the tube,” said Soundara Kumar, a deputy managing director at State Bank of India (SBI) heading its stressed assets management department. “Giving a loan is the relatively easy part, but recovery is far more difficult. You have to act before the loan fully goes bad. All such loans very closely monitored now through multiple channels.”
About 6% of SBI’s loans have turned bad and Kumar’s department is handling at least Rs.20,000 crore worth of loans.
To hasten recovery, SBI has formed three different committees about two months ago to monitor stressed assets and is likely to install a computer software by June to detect early signs of slippages.
While Kumar heads one of the three committees that monitors stressed assets worth between Rs.50 to Rs.100 crore, loans between Rs.100 crore to Rs.500 crore are monitored by another committee headed by Pradeep Kumar, managing director in charge of corporate banking. Loans of above Rs.500 crore that might turn bad are monitored by a group led by SBI chief Arundati Bhattacharya.
India’s largest lender has also designated 52 branches as dedicated stressed assets recovery branches, which handle recovery of loans in the range of Rs.10 lakh to Rs.1crore.
A programme called Kitna Baki Hai (how much is left) to recover bad loans in the agriculture segment, which constitutes 19% of SBI’s total gross non-performing assets (NPAs), has also been launched.
Under this, branches will report the progress of farm loan recovery to headquarters on a daily basis.
“In the past, there used to be some disconnect between our branches and farmers,”said M.G. Vaidyan, chief general manager, rural and agricultural business, at SBI. “We are now on a serious mission on the ground to reconnect the farmers and, in the process, bring down the bad loans.”
Mounting pressure
The story is not different for other state-run banks, which are fighting hard to pare bad debt on their books.
Gross bad loans of Indian banks grew to Rs.2.43 trillion at the end of December, about 36% rise from last year. That’s only half of the total stressed asset pile.
About Rs.4 trillion of loans are being restructured under the so-called corporate debt restructuring mechanism and through bilateral restructuring.
Together, stressed assets constitute about 11% of the total loans of Indian banks. These loans too can turn bad in a slowing economy, eventually impacting the health of the financial system.
India’s economy grew at 5%—the lowest in a decade in the fiscal year 2012-13 and is widely expected to grow at sub-5% level in the current fiscal year as well.
Rating agencies have already flagged their caution on the rise in bad loans.
In February, India Ratings and Research Pvt. Ltd, formerly known as Fitch India, said it expects Indian banks’ stressed assets to grow to 14% of total loans by March 2015. Icra Ltd, another rater, on Thursday said that the gross NPAs of banks could rise to 4.2-4.4% by March, from 4.1% as on December.
Of this, the gross NPAs of government banks could rise to 4.8-5% by March, Icra said.
“The earlier banks recognise NPAs and take a hit on their books, the better. The more you delay it, the problem will only become bigger. Banks need to isolate the stressed assets and address the issue separately. Do not mix it up with normal business,” said Saurabh Tripathi, partner and director, head of financial services, Boston Consulting Group.
The rise in bad loans has also put pressure on the capital base of state-owned banks, since they are required to make additional provisions against stressed assets. Under existing norms, banks need to set aside 5% for a loan they restructure, while the provisioning can rise to 100% if the asset turns bad.
However, the Congress-led United Progressive Alliance government set aside only Rs.11,200 crore for capital infusion into government-controlled banks for fiscal year 2014-15, lower than Rs.14,000 crore last year. According to Moody’s Investors Service, this is less than half of what Indian banks actually need to meet the advanced capital norms under the global Basel III rules.
Against this backdrop, state-owned banks are facing immense pressure from the government, the majority shareholder, to recover loans and reduce bad debt.
“Biggest challenge facing the public sector banks is NPAs,” finance minister
P. Chidambaram said on Wednesday after a review of the performance of state-owned banks. Chidambaram asked banks to focus on recovery.
P. Chidambaram said on Wednesday after a review of the performance of state-owned banks. Chidambaram asked banks to focus on recovery.
To recover money, banks are pushing their officials to do door-to-door recovery, employing call centres to make regular follow-ups, besides clamping down on wilful defaulters.
“Our call centre makes about 700 calls per day to our borrowers across the country. This has doubled our recovery. Going forward, I think this will be a very important tool,” said V. R. Iyer, chairperson and managing director of Bank of India, another large state-run bank, on 30 January when the bank announced its December-quarter earnings.
State-run banks actively using call centres for recovery of loans was less heard of till recently, unlike their rivals in the private sector.
“There is lot of focus going into recovery,” said Arun Kaul, chairman and managing director of UCO Bank, another state-run bank. “On giving new loans, we are very cautious,” said Kaul. UCO Bank had 5.2% gross NPAs at end-December, compared with 5.5% year-ago.
Origin of the problem
Behind the current bad loan pile of government banks lies years of lapses in the due diligence process while giving loans, soft approach of banks towards defaulters, a slowing economy that has impacted the cash flows of corporations and clearance delays for large projects that has resulted in cost overruns, experts said.
“Till a year back, banks were saying that things were fine (with regard to bad loans). If the rating of a firm is downgraded, recognize that there is an issue,” said Ananda Bhoumik, senior director at India Ratings and Research. “Banks must ensure that the concentration risk to any sector or a company is under control. Also, the underwriting process needs to be up to speed.”
In the recent past, banks have also been facing an increasing number of cases of wilful defaulters, or companies, which have the means to pay back but wouldn’t do so. SBI alone has classified about 1,187 borrowers as wilful defaulters for loans amounting to Rs.9,980 crore.
However, recovering money, particularly from corporate defaulters, has proved difficult, say bankers.
“The entire system should support banks to recover money, sending a message to the defaulters that loan dues have to be paid. Like chapter 11 (bankruptcy law) in the US, there should be laws in India that allow banks to wind up a defaulting company faster,” said R.K. Bansal, executive director at IDBI Bank Ltd. “For instance, if banks want to sell the assets of a defaulted borrower, it takes lot of time as borrowers often approach courts and secure legal stay, prolonging the process.”
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