Did Rajnish Kumar Manage To Make SBI Asymptomatic?

State Bank of India is “asymptomatic and has built strong immunity” against asset quality issues, Rajnish Kumar had said at a press conference in July. Kumar, who retired as chairman on Oct. 6., was announcing the bank’s earnings for the first quarter, where bad loans had fallen further.

Kumar’s optimism may have been premature since the impact of the Covid-19 crisis on the Indian banking sector and on SBI is yet to be seen. Still, Kumar, who retires after a 40-year stint at India’s largest lender, can take some comfort in the fact that he is leaving the bank with a stronger balance sheet than it had three years ago.

“The agenda has been largely achieved, but it is always work in progress for a large organisation like SBI,” Kumar told BloombergQuint in an interview. “Directionally, yes, the bank’s balance sheet has been repaired, NPAs are completely in control, the provision coverage ratio is the highest, profit was the highest ever last year and this year the record is likely to be broken,” Kumar said.

As on June 30, SBI’s gross non-performing assets ratio stood at 5.44%, compared to the peak of 10.91% in March 2018. It’s provision coverage ratio was at over 86%.

Accelerating The Clean-Up

Kumar, who started as a probationary officer in 1980, has served in nearly all divisions at State Bank of India.

He took over as chairman soon after predecessor Arundhati Bhattacharya stitched a merger between SBI, five of its associate banks and Bharatiya Mahila Bank. While the merger put SBI in the league of the top 50 banks globally, there was a spike in bad loan ratios.

In the first nine months of Kumar’s term as the head, SBI reported large losses due to elevated provisioning against bad loans.

Relief came in the form of one-off large recoveries, such as those from the resolution of Essar Steel Ltd. “Every day I pray to God,” Kumar once told reporters in response to repeated questions when the resolution of Essar Steel would close. It eventually did and added Rs 3,955 crore to SBI’s net profit in the October-December 2018 quarter.

While Kumar, his team and the banking sector saw some wins over the last few years, they also faced their share of losses.

The insolvency of Jet Airways (India) Ltd. was among them.

In early 2019, Jet Airways was nearing collapse due to unsustainably high debt on its balance sheet. On March 25, 2019, lenders led by SBI decided to take over majority shareholding in the airline so they could negotiate with potential buyers. At the time, Kumar had said that this was temporary since there was considerable interest amongs potential buyers.

It didn’t play out that way and the airline was grounded in April 2019.

“When he said the resolution of Jet Airways would be completed in a few months, he was fully confident that it is possible to save the airline,” said SBI’s Former Deputy Managing Director PN Prasad, who was leading Jet Airways' resolution before the matter went to India’s bankruptcy courts. “In fact, even as chairman at the bank, he spent hours, often extending till midnight, talking to potential investors, the promoters and Etihad Airways to resolve the Jet Airways case, which he didn’t really have to do.”

While speaking with BloombergQuint, Kumar said the situation at Jet Airways would have been different had regulatory issues not come in the way.

“The investors were willing to put money at a price and for a stressed asset nobody wanted to go for an open offer. Banks did put in a lot of effort to ensure that Jet Airways continues flying as it was the only full-service premier airline in the country,” he said.

Along the way there were other large challenges, from the fall of the IL&FS Group to the bankruptcy of Dewan Housing Finance Corp. Ltd. Kumar, like every other SBI chairman, had to juggle the good with the bad.

Rescuing Yes Bank

Restructuring and rescuing weak corporate balance sheets has become common fare in the Indian banking sector. What is rare is rescuing a bank. Under Kumar’s leadership, SBI had to do that too.

On March 5, the RBI placed Yes Bank under a moratorium, suspended its board and removed Ravneet Gill, then managing director and chief executive officer. Depositors were told they could not withdraw more than Rs 50,000 during the moratorium.

Unlike smaller cooperative banks, which may not have posed a systemic threat, the rescue of Yes Bank could not have been allowed to drag on. At the same time, the size of Yes Bank's balance sheet meant that an outright merger with a larger lender was tough.

Enter SBI.

Within days, the SBI board prepared a rescue plan, which involved eight other private sector lenders. The plan was to infuse equity worth Rs 10,000 crore into Yes Bank to control the situation. SBI, as the largest lender, took up majority of the equity and helped stabilise Yes Bank’s operations.

“The RBI allowed enough time to the management to raise capital and come up with a market-determined resolution. But that did not happen and there was a situation where the bank reached a point of non-viability. Then the mantle fell on SBI to lead its revival and it was not possible for any other bank to lead that,” Kumar said.

According to Sunil Mehta, the current chairman at Yes Bank, the support from SBI, which Kumar led from the front, was exceptional. Since then, however, Kumar remained hands-off. “Even though SBI has significant stake in Yes Bank, he [Kumar] has never interfered in the bank’s operations. He allowed the team to function, by offering support where needed. He has been a great asset to SBI,” Mehta said.

Beyond Crisis Management

While much of Kumar’s attention may have been drawn towards crisis management, he appeared to make enough time to look beyond that.

Developing and building out SBI’s digital banking application YONO was among his priorities. Kumar spent considerable time and energy in developing YONO, said Sunil Srivastava, former deputy managing director at SBI. “The idea behind YONO was to give adequate digital solutions to the bank’s wide retail clientele and also develop a platform which can be given to other banks for use,” said Srivastava.

While Kumar will not be around to see the YONO project to its logical end, he, in recent comments to BloombergQuint, said the bank intends to hive it off in a separate unit and open up the technology for use of other banks.

‘The Worst Is Behind Us’

Through all the ups and downs that were thrown his way, Kumar seemed to hold on to his optimism and his dry sense of humour.

“The worst is behind us,” he was often heard saying at earnings press conferences. In some respects, Kumar may have been right, but the markets did not take much confidence from the optimism.

The stock has under-performed private peers and continues to trade below book value.

“His aim to reach 1% return on assets continues to remain a dream. While he has done a commendable job in making the bank’s subsidiaries rich, the core banking business has seen a sharp de-rating owing to sectoral issues which SBI is not immune to,” Suresh Ganapathy, analyst at Macquarie, said.

At the end of the first quarter of the current financial year, SBI’s return on assets stood at 0.42% compared with 0.25% a year ago. According to Ganapathy, this is unlikely to improve for the rest of financial year due to the pandemic. This is despite the bank’s strong capital position, its improved profitability and a strict control over asset quality.

According to Kumar, the 1% RoA target was for March 2022 and the bank is well on its way to achieve that.

“It all depends on how the credit cost plays out in a normal scenario as well as a stressed scenario (owing to the pandemic). If the credit cost remains under control, the bank can achieve its RoA and RoE targets,” Kumar said.

As Kumar exits, he hands over charge to an executive who has worked closely with him over the last few years.

Late on Tuesday, the government announced that Dinesh Kumar Khara, managing director incharge of subsidiaries and SBI’s international business, will be taking over as chairman for a period of three years.