State Bank of India (SBI) has good news for the Indian economy. Notwithstanding all the news about a liquidity shortage among non-bank lenders and capital-starved banks, the economy will not be starved of credit. Rajnish Kumar, chairman of SBI, said the bank is well positioned to cater to the economy’s credit needs with a healthy capital base and enough liquidity. The lender’s capital adequacy ratio is 13.56% at the end of the September quarter, much higher than the regulatory mandate of 9.5% and its credit-to-deposit ratio is 66-67%.
And, what better timing than now when most of its competing non-banking financial companies (NBFCs) are struggling with liquidity issues. In fact, SBI is willing to lend a hand to them by buying off their portfolios to free up their capital. In October it bought ₹5,250 crore worth of loans from NBFCs and is willing to purchase another ₹15,000 crore in the coming months.
With the overhang of bad loans seemingly receding, SBI hopes to grow faster even as it begins to get back money from errant borrowers.
Its performance metrics on asset quality for the September quarter give enough indications of a meaningful improvement. SBI’s slippages for the quarter added up to ₹10,788 crore, the lowest in a year. With loans decaying slower than before, toxic assets as a percentage of the total loan book slipped below 10%. Ergo, the lender had to provide 30% lower than it did a year back for such loans.
What’s more, SBI topped it off with a return to profit after reporting losses for three consecutive quarters.
The lender could also recover a decent amount from past written-off accounts. Kumar said that the bank is sitting on a potential provisioning write-back of ₹6,000 crore, and it is confident to recover it from a steel account currently in insolvency courts. SBI has provided for more than 70% of the amount for accounts currently under insolvency proceedings.
But it would be unwise to leave out the potential troubles for the lender.
To start with, investors have to reckon that SBI has ₹4,000 crore worth of exposure to special purpose vehicles floated by subsidiaries of the troubled Infrastructure Leasing and Financial Services Ltd (IL&FS). It has close to ₹250 crore direct exposure to IL&FS and another ₹90 crore as equity.
Slippages from its loans to small and medium enterprises have been rising. The push from the government to give credit to small businesses cannot be ignored by SBI, hence, the lender is prone to taking on more risk.
That said, investors were elated by its second quarter results, sending the SBI stock up 6%, before it settled 3.5% higher for the day. Even so, the stock trades at a modest multiple of 1.1 times its estimated book value for FY20, indicating abundant caution on the part of investors.