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India's largest lender is finding fear can be a potent weapon in recovering loans

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A man speaks on his mobile phone while sitting inside a ferry under the advertisement boards of State Bank of India (SBI), on the bank of the river Ganges in Kolkata, India. State Bank of India is having an easier time negotiating with business owners keen to avoid the nation's two-year-old bankruptcy law.

[MUMBAI] With 1.8 trillion rupees (S$34 billion) in bad corporate debt to clean up, State Bank of India is having an easier time negotiating with founders keen to avoid the nation's two-year-old bankruptcy law, according to Anshula Kant, a managing director overseeing stressed assets at the lender. That's because a crackdown by policy makers 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,'" she said, referring to the National Company Law Tribunal, which oversees bankruptcy cases. If the founder is "genuine we don't want him to lose the company."

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 pressured 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 per cent in September from 11.5 per cent six month earlier, though it remains among the worst for a major economy. For SBI, it stands at a one-year low of 9.95 per cent.

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SBI is working with the founders of several mid-sized companies to restructure loans and escape bankruptcy proceedings, said Ms Kant, who joined SBI in 1983 and was previously the lender's chief financial officer. One-time settlements are a "preferred choice" if founders have funding, with the bank willing to take a haircut of as much as 40 per cent, she said.

While such settlements are beneficial, founders also need investors to come forward with fresh capital to ensure companies remain viable longer-term, according to Mathew Antony, managing partner of Aditya Consulting, an advisory firm that's working with some bankrupt firms to raise money. "It is equally challenging for promoters to find fresh funds," he said.

India's bankruptcy law is better suited for accounts where several lenders are involved, making it hard to get everyone to agree to a restructuring, according to Ms Kant.

Consensus building isn't 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 recently sought bids for US$2.2 billion of loans to Essar Steel India Ltd after the company's founders challenged the mill's sale. Essar was among the first 12 companies forced before the nation's bankruptcy court by the regulator in 2017.

Lenders to the so-called ‘dirty dozen' lost out on 40 billion rupees in additional income due to delays in the resolution process beyond the time mandated by law, according to rating company ICRA. The number of cases of corporate debtors admitted before the courts that are yet to be resolved stood at 816 in September, it said.

SBI is also working to increase the amount of money it sets aside for soured corporate loans. The lender plans to raise its provisioning to about 70 per cent by March 2020 from about 57 per cent currently, Ms Kant said.

"We want a cleaner balance sheet," she said. "It will be our endeavor that all corporate non-performing loans will be provided up to 70 per cent by end of the next fiscal."

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