Blame NPAs on bad economy & the way we managed

Written by Vishwanath Nair | Ira Dugal | Updated: Sep 21 2013, 03:07am hrs
State Bank of Indias (SBI) decision to raise deposit rates and base rates has been driven by tight liquidity conditions left in the wake of RBIs attempts to stem the fall in rupee by keeping domestic liquidity in check. Barely a few days before he retires, Pratip Chaudhuri, SBI chairman, in an interview with FEs Ira Dugal & Vishwanath Nair says the measures have put undue pressure on liquidity. The outgoing chairam says one of his achievements has been the improved profitability of SBI while acknowledging the problem of non-performing assets has been a persistent concern over his two-and-a-half-year tenure at the bank. Excerpts:

Are you critical of RBIs recent moves to tighten liquidity and the manner in which it has been done

This is something we have not seen before. If there is too much cash floating in the economy, you make a public declaration and raise CRR (cash reserve ratio). But why do it past 5pm and say I am not raising CRR, but the daily balance has to be 100% Similarly, RBI says its repo rate is 7.25%, but only 20% of my borrowings can come from the Liquidity Adjustment Facility (LAF) window at that repo rate. Is that the real policy rate then I dont think so. The real rate is the marginal standing facility (MSF) rate of 10.25% from where banks are meeting most of their requirement.

What do you think is important to do now

To release liquidity. Call rates shot up to nearly 50% last weekend and then RBI had to annouce a special two-day MSF window. Deposit rates have shot up too. Short-term rates today are 10-10.5%. At least SBI has maintained them at 9% publicly. Other banks are paying more than 10%. The government itself is offering 11.5% on 60-day paper. So what happens to the retail borrower. And if you are getting 11.5% return on a 60-day paper, why should I invest in the governments 10-year bond. So I am very interested to see how the next 10-year-bond auction fares.

Do you think the swap facilities being offered on FCNR deposits and overseas capital raising for banks will help

Its not as simple as we are making it out to be, particularly for banks with international offices. There are very strict rules against what is called upstream lending that you go and open a branch in the US, raise funds and ship it back. We have raised funds overseas through medium-term notes. But you cant convert that into rupee and bring back. That is called upstream lending. You can use it in the country where you raised it. This problem will arise for all banks that have foreign offices and if you are regulated in those countries.

What about the FCNR facility Foreign banks are looking to provide leverage to customers to park funds in this facility...

How can you do that You cant leverage a bank deposit. You can leverage a bond. You cant lend against another bank deposit. For example, Citi cant lend against a SBI deposit.

But they can offer leverage to your own clients...

But there is still a country risk that you are taking, isnt it. Secondly, you can only accept these deposits from persons of India origin.

So is SBI not looking at this actively

We are trying. We will do some $20-30 million business. Besides FCNR funds are put to work to lend to Indian corporates in dollars. If I pull that money out and swap it, I withdraw that line of dollar funding to Indian corporates.

NPAs continue to be a worry for banks and for SBI and it has been so throughout your tenure. Who is to blame for this mess

It was partly the bad economy, but also the way we managed it. Take for example the export portfolio, we saw about R700 crore in NPAs from the diamond industry alone. But on that R700 crore of NPA, you may lose R500 crore or you may lose R200 crore. In that case, we had walked out of ECGC, so our risk was higher than other banks. So we had to de-risk. Secondly, SBI had a disdain for external ratings. We used internal ratings which come with a lag. External ratings are more current. So if you do an analysis of accounts that turned NPA, we linked it to our internal ratings which allowed them to qualify for loans. So now we pay more attention to external ratings. We have also gone in more for term loans where the security is more. With SARFAESI Act and DRT, it is easier to recover funds in case of term loans.

But werent bankers at fault in terms of inadequate due dilligence particularly on power and road sector loans. The Planning Commission had recently written a scathing report on this...

The same people have blamed the banks for not lending enough. For example, in the case of a power project, if there is a fuel-supply agreement with Coal India, should we treat it as a scrap of paper or should we treat it as respectable. In case of road projects, once you start acquiring land, prices can shoot up as it was seen across many projects. So what we are looking at is the cost after two years. Within two years, costs such as construction, cement, land, labour cost have all gone up.

Its easy to say these things. If others are more qualified to do this, why dont they take over the appraisal and be willing to certify. Any criticism has to be based on an alternative.

What about now when there is such heavy restructuring going on Are banks ever-greening

Just because tenor on a term loan is being extended, it should not be considered restructuring. Globally, most regulators say you should make a rational assessment on whether the extension that you are giving is covered by the useful life of the asset and whether the cash flows coming through are enough to support it. Point I am making, is that current interest has to be serviced. If current interest is not paid, then its an NPA. No two views about it. But if that interest is collected in 15 years instead of 10 years, the account should not become an NPA. Even if there is a renogotiation of terms, what is wrong with that as long as the underlying asset has a useful life and cashflows. We have suggested this to the regulator and some of this has been taken into account.

People seem to take pleasure in condemning banks. What they dont realise is that they are making it difficult for banks to borrow abroad and for investors to invest in Indian banks. Indian banks are also serving a larger purpose and attracting capital. If you flog that, then who will put in capital

What to your mind were some of the key successes of your term

I took over as chairman when the profit was R9000 crore, next year it was R11,000 crore and now profit is above R14,000 crore. So, two consecutive years of higher profits. We have also made full provision for super-annuation liabilities. Not to provide for super-annuation is not something that is normally associated with an organisation like SBI. Pension liabilities are difficult to estimate but you cannot provide zero for these liabilities. Im also leaving the capital adequacy ratio at 9.7% in terms of Tier 1 capital.

What were the operational decisions that helped push profitability

I was lucky in the sense that the base rate was introduced soon after I came in and that helped reduce the irrational pricing in the corporate loan market. Secondly we did not allow any segment to become a loss leader. So while topline is important, not at the cost of the bottomline. So every activity must have a marginally positive contribution. Also I have always felt that in any industry, the winner is someone who has access to cheap raw material. In a bank the raw material is deposits. So we decided to do away with high cost bulk deposits. On the lending side, we found that it is much more profitable to give term loans than working capital loans. If term loans are 8%, then working capital will be above 10%. And working capital also ends up being permanent because you dont call off the limit and the utilisation is volatile. So we increased term loans in our lending mix. If the ratio was 55-45 in favour of working capital, it has now become 40-60. We also optimised the tax rate. We were paying 40-45% and that has come down sharply.