SBI: Growth Rate Must Be Much Higher to ‘Fix’ Business Cash Flow: Dinesh Khara
How do you feel about the state of the economy after a visible acceleration in the pace of vaccinations?
Our internal business activity index is at pre-pandemic levels. But to come out of the damage of the last 20 months, activity levels have to be much stronger. There was already a slowing down trend before the pandemic; therefore having arrived at the pre-pandemic is positive but it is not enough. The growth rate must be much higher because the cash flow of many businesses needs to be repaired.
Private capital investment has not really picked up for many years. What are the trends you see?
Lately we have observed that certain sectors, particularly iron and steel, aluminum and other key sectors, have actually struck a chord on capacity utilization. We are seeing green shoots in terms of new investments; this is therefore a major deviation from pre-pandemic levels. Hopefully the construction sector will take the lead as a major growth engine and related to this will be steel and cement etc. These sectors will therefore take the lead. Recent government initiatives in chip manufacturing as well as the various Production Incentives (PLIs) that have been announced will also support capacity building.
But do you see a demand for loans from these sectors?
Yes, in the case of iron and steel we are seeing investment proposals and people have approached us for new loans as well. People are also looking to increase brownfield capacity, which means they have very clear visibility into demand, which also bodes well for capacity utilization. These are the positives that we see over the last six months or so. The government of India and other public sector entities are also in their own investment process. The road sector continues to do well and we continue to receive proposals. These will ultimately be the engines of the economy.
Recently, a possible bankruptcy was avoided at Vodafone Idea. Are you satisfied with the measures taken by the government?
The way I see it is that the company will be able to save money that can eventually be used in technology expenses. This will create positivity in the industry which will help some of the players to attract foreign investors. Some companies have been forced to invest in the technology due to low revenue per user (RPU). So, if they can upgrade their technology, it will help them improve RPUs, which in turn will help them overcome liquidity issues and equity capital may also come in due to the narrative shift. Operationally, profits will also improve.
We have seen important cases resolved by the IBC. But are there steps that can be taken to improve and speed up the process?
The bankruptcy process led to the creation of a resolution ecosystem because NPAs have been a problem for some time. Previously, the ARC experiment was conducted when the banks could return these assets, but we saw that there was not a lot of added value and they just bought and held. Unless there is a restructuring, the creation of value will not take place. After the IBC, the ecosystem is created, which greatly contributes to the creation of various options. Today, the value of a compromise settlement can also be attributed to this ecosystem; so the balance has changed. Yes delays are a concern but we have to keep in mind the 18 to 20 months of the pandemic. Going forward, if we meet the deadlines, this could be one of the best vehicles for resolving brownfield assets. Western countries have taken 10 years for the law to stabilize.
Does New Failed Bank Help End All Legacy Problems?
Being a capital-deficit economy, we need to find ways to conserve capital. Once a case is referred to the IBC, there is no way to sell it to a potential investor, which is possible in a bad bank. More importantly, the bad bank will lead to the aggregation of underlying assets, which in itself will be accretive. Third, there used to be disputes between lenders that could be avoided through agreements between creditors. So the overall resolution can happen quickly which will help get a much better value.
Credit growth is sluggish despite record rates and easy liquidity. What will it take to change?
Besides the pandemic, there has been significant deleveraging of around 2 lakh crore. Speaking of SBI, the underutilization of facilities for large companies is 50% and around 25% for medium companies. Term loans that have been sanctioned but unused stand at 29%, reflecting the demand for credit and the growth of the real economy. Once capacity utilization improves, it will show up in term loans and working capital use.
Is the market undervaluing the SBI?
I strongly believe that the market undervalues SBI because if you look at our two listed subsidiaries, these are over 2 lakh crore and our shares are 55% and 70% respectively. We also have many unlisted subsidiaries which are doing very well and more than 22,000 branches, 70,000 sales correspondents and as many vending machines. This is the power of our distribution network and to that extent the value of the bank has been greatly underestimated.
Are you planning to list the activities of MF and property and casualty insurance?
We have projects but these are more intended to meet the aspirations of these companies. They have become great in their own right. We don’t intend to use it as a pocket to monetize our assets and get our share. The mutual fund will be the first to be listed, but it is still a long way off.
The Minister of Finance said we need 4 to 5 more SBIs. Could the next SBI be one with just a QR code?
With the levels of financial literacy in this country, unless people see the board of directors of an entity in a city or town, the confidence is not there. We have opened over 120 million Jan Dhan accounts that were zero balance accounts but today they have an average balance of 3,000, indicating a financialization of savings. The next step is the overdraft facility. It has also helped curb the waste of government resources. So we cannot wish for branches. We have no embargo on branch expansion.
You have made structural changes. Can you elaborate?
There are a few areas of interest; one is awareness for the financing of SMEs. Previously, our regional offices were not authorized to grant loans to SMEs, so we strengthened the structure there with an AGM SME. There are around 500 regions across the country and therefore these officials spot SME opportunities in their field of activity, process and ensure faster delivery. We have a team of over 30 data scientists to create algorithms which are executed on our database upon which we support our ground level operations. Business credit will continue to grow steadily; that’s why we focus on personal loans.