Rajnish Kumar is the fourth chairman of the State Bank of India (SBI). Kumar, 59, joined SBI as a probationary officer in 1980 and has served as managing director of the bank. He is considered as one of the most experienced person in the corporate banking and international banking divisions of SBI. In an exclusive interview to CNBC-TV18, Kumar said promoters pledging shares for loans a bad idea and it is not the right business model.
“If you have pledged your equity, it means that your stake in the enterprise must be deducted to that extent then your net equity has to be determined,” he said.
Funding to nonbanking financial companies (NBFC) is growing and money is available to good quality nonbanking financial institutions, Kumar said.
In a wide-ranging interview, Kumar also spoke about the banking sector, real state sector and retail loan portfolio of SBI, among a reft of other topics.
Watch the video here:
What was the banking systems’ problem has become the non-banking financial companies’ (NBFCs) or the non-bank financial sectors’ problems. What is the sense you are getting when you observe problems faced by the debt mutual funds and the NBFCs, repeatedly every now and then, one company saying it is not able to pay up, do you think that we are going to have more accidents leading to more non-performing assets (NPAs) for the entire financial sector?
If there is a non-performing asset (NPA), whether it is in non-banking financial companies (NBFCs) or in the banks, it cannot be that there is an NPA with NBFC and then the bank will escape, that is not possible. You have to look sector by sector, which sector have invested their money and whether there is a stress in that sector. That will determine the recovering situation of these NPAs.
These couple of situations which have arisen in respect of three-four corporate houses where there has been an issue around loan against shares that we have to keep separate and if there is a problem in the real sector, that will definitely get passed on to the financial sector.
If you look at it, the turf of the NBFC has been entirely different, there is some overlap between NBFC and banks in the retail segment. Apart from the overlap they are distinct business models and distinct areas of lending.
It is not the distinct areas of lending, my point is until now we were worried that if the NBFCs don’t get funding, which has been the case then the real estate sector will be affected because they were depending on NBFCs, what we now realise is that there is a second pain-point which is promoter entities also don’t get funding. Now when these promoters have to pay back, if they default, what happens? Likewise, if the real estate companies – their payback time comes, what happens? So for the entire market, entire financial sector, are you convinced that the worst of NPA is over or is there going to be a decent amount of incremental defaults?
No, at least, I am convinced that incremental default situation is not there and if you talk about flow of money to NBFCs, if you look at the numbers which have been released by the Reserve Bank of India (RBI), there is a growth in funding to NBFCs but quality will always be central to lending and there are ‘n’ number of NBFCs, which have good quality, good governance and there is money available for those NBFCs. So we cannot generalise that money is not available to NBFCs.
So we cannot generalise that money is not available to NBFCs specifically to the promoter funding, I think the promoters pledging their equity, that is something which needs to be watched on and it is not the right business model because if you have pledged your equity, it means that your stake in the enterprise must be deducted to that extent then your net equity has to be determined. So that is a debatable issue but overleveraging your own equity, I don’t think it is a very good idea.
Third, in the last four years, there has been no bubble in the real sector. The sector was having a problem particularly the inventory was there and because of that inventory build-up, in the last four years, the position has now in fact in certain geographies has started improving.
However, this is a fact that for the developer funding, the bulk of the funding was coming from the NBFCs. To that extent, we need to be very watchful of the situation and good projects are again about quality. Any generalised statement would not be the right statement to make.
No sector is untouchable for the banks but the quality banks or NBFCs themselves will have to be very mindful of this fact that the quality is not compromised.
That is what even the NBFC says, it is not the liquidity issue, it is an insolvency issue whether you want to lend or not, but one last question on this problem. Do you think the debt market problems today can become a contagion and therefore become a systemic problem?
When it is a loan with the banks, there is always more time available to address the issues but the way the debt market works and they work mostly on the ratings and the investments, the manner in which they happen, the debt market in terms of patience, which bankers have more but in the debt market if it is a mutual fund investment or it is an NBFC investment, there the patience or the time to adjust the issue is much shorter and for the banks, it is relatively more time where you can apply your mind and try to resolve a situation.
We have picked up from the market that NBFC ecosystem that many of it were unilaterally raising interest rates so that their borrowers would have no option but to move on to banks. Because these NBFCs themselves wanted to create quick liquidity and these are not necessarily bad loans in that sense, they were in better-considered segments, have you seen a sort of borrowers come to you moving away from NBFCs, have you seen that migration happened?
I have not seen any large scale migration from NBFCs to the banks but the cost of borrowing for NBFCs, it has gone up for some of the NBFCs by 25-30 basis points (bps) and that will get passed on ultimately to their borrowers. However, I have not seen many requests coming directly to us and even for the portfolio sale when we had announced the programme, but I have not been able to purchase the portfolio because there are no sellers.
So how much, I think you did Rs 3,000 crore, you announced something, of that Rs 14,000 crore how much could you buy?
The announcement was Rs 45,000 crore but till January we have only Rs 13,000 crore and other banks have bought more than us because of the competitive pricing. What I am saying is that there is a market for this and there are many players. SBI is not the only player and even the sellers, they have been able to take advantage of the competitive situation and get it priced to their liking.