SBI merger with associate banks may further deteriorate asset quality

Mumbai: State Bank of India (SBI) is likely to see a further deterioration in its asset quality following the merger of the retail loan portfolio of its five associate banks with the parent bank, a sign that the bad loan clean-up at the country’s largest bank is not over just yet, two bankers aware of the matter said.

On Monday, the bank raised Rs15,000 crore worth of equity capital through the largest ever institutional placement to cushion the balance sheet against any possible surge in bad loans.

The spike in bad loans in the retail loan book, which is expected to reflect in the first-quarter earnings, was noticed after SBI completed the data integration exercise across all associate bank branches last month, according to the first banker.

As on 31 March 2017, the aggregate retail advances of associate banks stood at Rs1.85 trillion, of which Rs12,000 crore have turned bad, said the second banker, on condition of anonymity.

In percentage terms, gross non-performing assets (GNPA) on the retail loan book of the associate banks was around 6.5%, similar to the GNPA figures on the standalone entity. Typically, the retail book consists of personal, agriculture, and small and medium enterprises loans.

“The underwriting standards of associate banks was different from that of SBI. We will now focus on faster recovery of these loans by linking all the associate bank branches to the retail asset processing centres of the parent bank,” said the first official, on the condition anonymity.

The corporate loan book of SBI’s associate banks also saw a sharp surge in NPAs during FY17 following the reclassification of these loans with the parent book. Consolidated GNPA of the bank soared to 9.06% as of March 2017 from 6.41% a year ago, wiping out a large chunk of the bank’s profit. This resulted in the bank reporting a net loss of Rs3,000 crore on its consolidated books compared to a standalone net profit of Rs2,815 crore at the end of the March quarter.

“The retail bad loans on associate banks’ books is unlikely to make any material impact on the bank’s earnings going forward. We expect much of the recovery of these loans to happen by the third or fourth quarter. We will continue to keep a watch on how quickly the bank is able to resolve its large stressed assets portfolio,” said Reliance Securities.