India’s largest lender is finding fear can be a potent weapon in recovering loans.
With 1.8 trillion rupees (US$25 billion) in bad corporate debt to clean up, State Bank of India (SBI) is having an easier time negotiating with founders keen to avoid the nation’s two-year-old bankruptcy law, said Anshula Kant, a managing director overseeing stressed assets at the lender.
That is because a crackdown by policymakers has convinced business owners that they risk losing their companies once the courts become involved.
“The first thing they say when they come to us is: ‘Madam, please don’t send us to NCLT [National Company Law Tribunal],’” Kant said, referring to the group that oversees bankruptcy cases.
If the founder is “genuine, we don’t want him to lose the company,” she said.
Recent bankruptcy proceedings that wrested prominent companies from their owners were a wake-up call for India’s business community, previously used to walking away from debts without major consequences.
At the same time, the regulator has pressed banks to take defaulters to court, giving lenders just 180 days to recast loans once a payment is missed.
The crackdown helped reduce the bad-debt ratio at India’s banks to 10.8 percent in September last year from 11.5 percent six month earlier.
For State Bank of India, the ratio stands at a one-year low of 9.95 percent.
The bank is working with the founders of several medium-sized companies to restructure loans and escape bankruptcy proceedings, said Kant, who joined SBI in 1983 and was previously its chief financial officer.
One-time settlements are a “preferred choice” if founders have funding, with the bank willing to take a cut of as much as 40 percent, she said.
The bankruptcy process itself is better suited for accounts where several lenders are involved, making it hard to get everyone to agree to a restructuring, Kant said.
Consensus building is not the only difficulty with the fledgling law. Legal challenges from founders, losing bidders and operational creditors have forced courts to extend the 270-day deadline for debt resolution that was enshrined in the law.
SBI is also working to increase the amount of money it sets aside for soured corporate loans. It plans to raise its provisioning to about 70 percent by March next year from about 57 percent currently, Kant said.
“We want a cleaner balance sheet,” she said.
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