With stress showing up in various sectors of the economy such as power, aviation, textiles, and real estate due to slowdown in domestic and global economies, State Bank of India is resorting to internal restructuring as well as corporate debt restructuring to help corporates get over the hump, according to Mr R Venkatachalam, Deputy Managing Director.

He observed that there are clear signs of a slowdown in demand for loans in the mid-corporate segment. Currently, the mid-corporate segment (units enjoying fund and non-fund based limits ranging from Rs 25 crore to Rs 2,500 crore) accounts for around 20 per cent (or about Rs 1.70 lakh crore) of SBI's total loan portfolio of over Rs 8 lakh crore.

In an interview with Business Line , Mr Venkatachalam throws light on some of the problems afflicting key segments of the economy and how his bank is doing a double check on loan proposals.

Growth prospects for mid-corporate segment

In the last few years, our loan portfolio has expanded by Rs 25,000 to Rs 35,000 crore every year. However, in the first half of this year the growth has not been much. Seeing the present trend, the MCG's portfolio should grow by around Rs 22,000-23,000 crore in FY-2012. Manufacturers have to contend with high interest rates and exchange rate fluctuations. Exporters are in a dilemma as to whether they should export to countries which they were exporting to earlier. If an exporter was earlier exporting to Greece or other Euro zone countries then he has to think twice now.

So, promoters who have planned projects are examining whether the profitability and viability that was originally envisaged is there. But this is a passing phase. Hopefully, things will settle down in six to nine months. Though growth in the country will give some respite, exports may take some time to revive.

Expansion plans

The MCG currently has 65 branches. However, we need to cover many areas in the country. We have plans to expand the network of mid-corporate branches. So, we are working out those plans. In Punjab and Haryana, we have only three branches. We feel that there may be better business opportunities in these two States. Delhi covers a vast area, so we have to look into whether we can have one more office there.

Coming to Mumbai, even though the city office was split into two – Mumbai and Pune — it has grown back to its original size in just two years' time. So, we may need another office here. The same holds good for Chennai also. MCG was started in 2004 with loans outstanding of Rs 24,000 crore. Today, the fund-based exposure alone exceeds Rs 1.70 lakh crore. In seven years, the growth is more than seven times.

Stress on loan portfolio

We can visibly see the stress on manufacturing units, not all of which is because of what is happening in India alone. It is also because of lot of global action or inaction. The problems facing the Euro markets, hopefully, will be contained but nothing can be said for sure. Same way, the US market appears to be stabilising, but still we have to see. This is affecting all the markets in and around us also. Even in China there appears to be some sort of slowdown. We are no longer insulated. Whatever happens elsewhere does affect us also.

The units are approaching us for restructuring. A similar situation was there in 2008. We managed to help many of the units then. We have our own internal restructuring mechanism based on RBI's instructions through which we can defer instalments or make payments slightly back-ended so that companies can get over the hump. Where it is a consortium arrangement or multiple banks are involved, the Corporate Debt Restructuring mechanism is useful.

So, we try to help the units in distress. At the end of the day, we have to observe a unit's viability over a period of time. If it is going to become viable then we feel it is our duty to help them. We look at clients under stress from this point of view and not what is happening today. But if slowdown is going to be a very long-drawn one, then perhaps it may be difficult (for banks to restructure) but even then we should try to ensure that clients are taken care of.

Aviation sector's woes

The entire industry has got real problems in the sense that the cost of Aviation Turbine Fuel (ATF), which ruled at $80 a kilolitre a year ago, today is $110. So, the cost has really shot up by almost 40 per cent. Fuel is the most important component of the expenditure of an airline.

In the context of existing airports being redeveloped and new airports coming up, airport charges are increasing. So, while facilities are increasing, the cost is also going up. Then a number of airlines, including low-cost carriers, have come up. Because of the competition, the fares are not increasing though the cost of fuel and airport charges have gone up substantially.

Delayed departures due to expansion works at airports and planes being airborne while waiting for landing cues consume extra fuel.

Because of competition, nobody is willing to increase fares. The fear is that if they do so they will lose the market share. The result is that almost all the airlines are squeezed for profits. Many of the major airlines have incurred losses. Quite a few of them have been incurring losses quarter after quarter because costs have only been going up whereas fares have not gone up so much. This is the problem.

Another major component of the costs is the duties. On the imported ATF, there are State and Central duties. Together they add up to a substantial figure. This is also crippling them. Airlines companies say duties work out to around 40 per cent of the cost of ATF. They want it brought down to the central tax level.

Then there is the issue of FDI in aviation. While FDI is fine, airlines want it increased to 49 per cent. Right now, the recommendation is for 24 per cent. As far as FDI goes, they want foreign airlines to also be included as eligible investors. This, they say, is because only an airline will know what another airline does.

For example, if somebody has to invest in real estate here, it will be easier for a foreign real estate company to invest. Similarly, airlines' is a specialised industry. Airlines, world-over, know where the market is available, where they can invest, and where the future market will be. So, they want FDI in civil aviation to also include direct investment by foreign airlines. These are the demands that domestic airlines are making and some of the demands are reasonable.

Conditions for restructuring sick airlines

We want promoters to bring in equity capital. But as of now, if you look at the state of the markets, there is difficulty. Everybody understands that. But this does not mean that the bankers will give everything. We are also answerable to the shareholders, public, the Government, and the regulator.

Equity is brought in to strengthen a company but, on the other hand, if it continues to incur losses then it becomes difficult. Under the given circumstances, if you do not have an opportunity to increase your revenue, then you will have to cut down the costs. May be, airlines should take a good look at short-haul routes such as, for example, Mumbai-Pune or Bangalore-Mysore, and so on.

So, airlines have to do all this by identifying where all they can cut costs without jeopardising safety and quality of services. Airlines' is an important segment of the economy. A growing country like ours cannot have airlines which vanish on account of losses. I'm quite sure the Government is looking into it.

SBI's approach to borrowers

Our focus is on quality. Where we used to vet loan proposals once, we now do so twice. That is the approach we are taking. People come with project ideas. It's ok. But whether in the present circumstances they will be able to implement the idea is what we are concerned about. We see the level of competition — if the competition too high and competitors are well entrenched then it may be tough for a newcomer to survive a cut in prices.

We are cautious towards loan proposals from stressed sectors such as power, aviation, real estate, and iron & steel. Itf somebody comes up with a real estate project, I'll think twice. The questions for which we are seeking answers are: What about the existing unsold inventory which is there in the market, what about buyers' affordability, whether the developer has any distinct advantage, what happens if the competition starts offering the advantage to lure customers before he does.

Today's borrowers are generally knowledgeable. They try to see how best they can cut down costs and how best they can take care of growth. But when they are under stress they do approach us. We also look into how we can reduce the borrowers stress, how we can facilitate smooth transition — through internal restructuring and CDR – of the unit during the stressful period. Unless there is absolutely no hope or we find that the promoter himself has given up or promoter starts adopting dubious methods such as diversion of funds, then we start thinking. Ultimately, promoters' involvement/integrity in their project is important.

kram@thehindu.co.in

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