Bankers across country frown upon SBI’s move to recast its Caps structure

MUMBAI: If it is not sorted out, a battle among banks could soon be drawn, with the country’s largest banker State Bank of India (SBI) on one side and other public sector banks on the other. 

Reason: SBI’s proposal to revamp the structure of SBI Caps, a wholly-owned subsidiary that advises banks and financial institutions whether and how much they should lend to a given corporate and how to restructure debt in case of a default, besides other services.

Worse, some bank chiefs have even raised concerns about the quality of service rendered by SBI Caps. 

And the numbers speak for themselves. In FY17, as per SBI Caps’ annual report, debts were written off in as many as 654 cases it advised, including 402 cases where the amount due was declared not recoverable, while over 71 cases were written off due to liquidity crisis by the borrower. 

SBI, on its part, is maintaining that its investment banking arm is a professionally run entity and that banks should have conducted their own due diligence before offering a loan.

“RBI norms are very clear that all banks must engage merchant bankers to do independent reviews before lending,” Rajnish Kumar, chairman, SBI told Express. 

He added that the proposal to merge or hive off SBI Caps’ divisions like loan syndication was as part of its ongoing business revamping strategy and to find synergies.

SBI’s project finance division is the lucrative business units within SBI Caps that raked in a plum Rs 383 crore in gross fee income, or nearly 90 per cent of its total income last fiscal. 

For long, SBI participated aggressively in disbursing corporate loans both large and small, and it was predominantly the lead banker. But bank chiefs admit that smaller state-run banks lacked enough muscle to do their own due diligence and simply relied on SBI Caps’ appraisal. 

Kumar, however, clarified that when it comes to debt restructuring it doesn’t consciously engage SBI Caps and instead the bank’s internal team restructures most of the bad loans. But here’s the catch.

“Currently, the arrangement is such that, if a client engages SBI Caps to redo loan repayment terms, it’s a different matter... we will go with it,” Kumar explained without disclosing the quantum where SBI Caps is mandated to recast the outstanding debt.  

With a majority of the cases SBI Caps appraised falling back on repayments, engaging it to restructure loans will obviously lead to conflict of interest, at least in accounts where SBI is one of the lending partners.

But as we speak, the investment arm is being engaged in various debt restructuring proposals, which some believe benefits SBI, despite the availability of other private merchant bankers including the investment banking arms of Axis, ICICI and IDBI Bank.

Apparently, the banking regulator RBI raised objections to SBI’s proposal (which includes merging SBI Caps’ loan syndication division with itself) citing conflict of interest and according to sources, bankers are now joining forces to oppose the move as SBI Caps is the market leader and has rendered project financing services to over 50 per cent of all loans that Indian banks have so far disbursed.

In fact, the SBI Caps was ranked first cross Asia Pacific and Japan (mandated lead arranger (for corporate loans) in 2016, as per the Thomson Reuters League Tables. It was also ranked fourth in the Global Project Finance rankings with a global market share of about 4 per cent.

Banks have also woken up and are opposing decisions that SBI Caps has put its approval stamp on. 

A case in point is the notable and complex merger proposal of Reliance Communications and Aircel, which eventually fell through, thanks to the active participating of banks and financial institutions.

Banking sources also confirmed that they will wait for RBI’s final take on the SBI Caps’ revamping proposal.

“The Indian Banks’ Association will take this up further, if it deems fit,” said another banker without disclosing a specific timeframe for such a deliberation.

He added that the prevailing market conditions and industry outlook added to the NPA pile. “We cannot put the entire blame on merchant banker’s advice if a suggested investment decision failed,” he explained.

Meanwhile, as if the underlying overlap of SBI Caps role in both loan syndication and debt restructuring is not enough, the government last year roped it into chart out the course of action for the mammoth Rs 2.11 lakh crore bank recapitalisation plan, which some bankers have raised the objection to. 

“Engaging an entity, which is partly responsible for the bad loan crisis, to roll out a survival package is self-defeating,” the official said.