State Bank of India (SBI) chairman OP Bhatt is confident that the Indian banking system has the wherewithal to cope with the challenge of bad loans, despite a sharp spike in the gross non-performing assets (NPAs) of public sector banks in the last one year. The PSBs? gross NPAs have risen 23% as on December 31, 2009 over March 31, 2009, as per the finance ministry data. SBI recorded the second-largest (after the Indian Overseas Bank) proportion of gross NPAs to advances at 3.33% as on December 31, 2009. But Bhatt said all the NPAs have been provided for and that the Indian banks were well capitalized and liquid. In an interview with FE?s Sunny Verma, Bhatt discusses a range of issues such as the country?s largest lender?s capital-raising plans, recent rates hike by the RBI and what to expect from the annual monetary policy review in April. Excerpts:
ICICI Bank has just got qualified full banking (QFB) status in Singapore. Will it intensify competition in the Singapore market?
I don?t think so. The world?s best banks, including us, are present in Singapore. We have 12-14 outlets in Singapore. How is it (ICICI Bank?s QFB status) going to make it more difficult for us? It?s a mature market. It?s a market where everybody is there. Competition is not going to make it difficult for us.
How does the qualified full banking status benefit a bank?
You can open 25 delivery outlets. You can do business in local currency.
Has the global banking market settled after the crisis?
It?s getting better. Singapore didn?t have that kind of crises like the real estate meltdown. Singapore is the financial centre and global slowdown had a secondary impact there. Our Singapore is business doing well.
When do you plan to approach the government for a rights issue?
We will start talking to the government in the next financial year. It will take some time. There is no hurry. We have enough capital. Our capital adequacy is 13.78%. But we take a long-term view, which is why the rights issue. We don?t want to hurry at the last moment. I haven?t spoken to the government yet, so I can?t say when exactly the rights issue will happen. All I can say is that we will talk to the government in the next financial year.
Bad loans have been rising. Can banking system adequately handle them?
There are two parts to this issue. One is the competence of the banking system to appraise projects, assess risks and monitor those projects on-site, among others. The other part is the financial side. Despite all that has happened; the gross NPAs (non performing assets) have been less than 3%. And all these NPAs have been provided for. I think the capacity in the system to deal with these issues is very much there.
But how big is a challenge is it?
It is not a big challenge because NPAs in the banking system are still less than 3%. They are all provided for. Capital adequacy of banking sector is in excess of 9-10%. All NPAs are provided for as per RBI norms. Liquidity is not an issue. I mean if in the banking business you won?t get NPAs, the you perhaps might not get it anywhere else. It is not 10-20% right, so even in a time of crisis if it is within 3%, there won?t be a problem. I mean it is not a systemic risk.
Is the 25 basis point rate hike by the RBI enough to tackle inflation?
What has happened is that over a period of time since January both the government and the Reserve Bank of India have been withdrawing whatever was the stimulus injected by the them into the economy. The government has done it through the Budgetary process. The RBI did it in January by increasing the CRR (cash reserve ratio) requirements in two tranches. As you know that inflation has been rising but I think it rose a little faster than the RBI?s comfort level and therefore they have done what they have done. This is the least they could do because after all they have restored only 25 basis points.
So the timing may a bit of a surprise because they could have done it at the time of the monetary policy. On whether they would do something more in the April policy, it will depend on one more set of inflation data due in March.
Can we see pressure building up on lending rates after the RBI measures?
As long as there is enough liquidity in the system, on the lending side it should not have any impact. If bankers are in the aggregate still putting money in reverse repo, then it should not have any negative impact on the lending side. There was also a CRR increase in January, there was an indication of tightening now. Liquidity in the system over a period of time has been declining, though it has not evaporated. So going forward, there are clear indications that balance between supply and demand of money will be there, it could be at that point of time, bankers will take a call on whether interest rates will go up or not.
When will you review interest rates?
We would like to wait for the April policy as far as interest rates on the lending side are concerned. So the earliest we will change our rates will not be before May.
Have the loan approvals improved in the recent months?
Very marginally. Home loan off-take is good, but it seems to have levelled off after good growth month after month. Home loan growth on a year-on-year basis is very good.
Will the rate hike and heavy government borrowings put pressure on bond yields?
This Budget is actually talking about fewer borrowings than in the last year. Even the gross borrowings may be only marginally higher. In the near term, the yield (on 10-year government bond) is going to be 8% or less. But again it depends upon what happens in April, what happens to liquidity. Right now, by March-end, I don?t think it is going to cross 8%. It should be well below that.
How do you look at expanding overseas, including global acquisitions?
Not immediately. See it should fit in with your requirement, with your public sector culture, with your business and customer requirements. If we get something like that we will see. But we are not looking very aggressively about acquisitions. We have got a huge network of our own including our international operations, which contribute about 13-14% of our revenues. It would not be right to put aggressive targets for overseas growth in the current environment.