Unhedged forex exposures could put pressure on corporate balance sheets, says Pratip Chaudhuri, chairman, State Bank of India. However, in a conversation with Ira Dugal and Vishwanath Nair, Chaudhuri says that onus of curtailing unhedged forex exposures should not be put on the banks. Instead, RBI itself should ensure that hedges are in place at the time of granting approval for overseas borrowings.
What is your assessment of activity and sentiment in the economy right now?
I think the biggest challenge is the current account deficit (CAD). One problem is the export sector. We don?t export enough and we need to try and push that. On the financial side, RBI needs to increase the refinance facility given to exporters. Currently, refinance up to 50% is allowed, we should increase it to 100%.
One of the implications of the CAD has been a weaker rupee. Will a weaker rupee add to corporate sector stress?
What is poison for some, is meat for others. There would be some gainers and some losers. Companies which are into exports, particularly in the mid-corporate segment, would benefit. The segments facing pressure from cheap imports would also benefit. India has signed a number of FTAs which led to cheap imports in sectors like steel. So they too would benefit.
Do banks need to tighten policies on unhedged forex exposures?
Are you expecting RBI to increase risk weights and provisioning on that account?
Not really. Why should RBI leave it to the banks? RBI itself should do it when it gives permission for ECBs. The central bank should stipulate that if the company does not have a natural hedge, then it must put appropriate hedges in place. In many cases, especially of overseas borrowings, it does not come through the banks. For instance, when NTPC did a foreign bond issue, very few of the domestic banks participated. So it should be tackled at the time of approving the issue. The onus for managing the risk can?t be on the banks, it must be on the companies.
But can?t banks do anything to ensure their clients are hedging?
I don?t think so. It matters to banks only to the extent that it hits us. When we tell the corporate that you go and hedge, they tell us that the whole advantage of borrowing in the foreign market is lost due to the cost of hedging. And then they can tell us, you don?t get into my kitchen.
At a macro corporate level, do you see unhedged forex exposures as a problem, especially when so many corporates have been going in for dollar borrowings?
Yes, it poses a problem. Even if you don?t have a dollar borrowing, many of the balance sheets are ?dollarised?. Take, for instance, anybody who is importing coal for generating power. I am saying coal because it?s a bulk commodity.
They are all exposed to the rupee-dollar parity rates.
Have banks slowed the sale of gold coins?
We are not very big sellers of gold coins. We only sell to our customers and even then it?s up to R50,000 against cash. Banks overall sell only 20% of coins so the impact that banks can have in this regard is limited.
Have gold imports due to these various measures started to come down?
I have not checked but anecdotally it seems to have come off.
Moving on to banking, one of your competitors Bank of Baroda has brought down rates in the home loan segment. Is there any scope for SBI to bring down rates?
Even private banks which are supposed to have strong distribution have rates higher than us. We keep reviewing the rates in our ALCO and we are still the lowest but we can?t go any lower till the post office rates are brought down. Post office rates are 8.5% and 9% for senior citizens. We are at 8.75% and 9%. If we go below post office rates, we will lose deposits.
So there is no scope to cut rates?
No, we have no choice. We tried that in the December quarter. We brought down the rates to 8.25% and there was a huge flight of deposits. There is some flight to safety which benefits us but the message we have taken is that so long as we are 25 basis points below, people are willing to accept. A 50 basis points discount, people are not willing to accept.
So, even if RBI does cut rates, it won?t help right now?
RBI rate changes impact the wholesale debt segments, the bond markets. But government savings instruments and the rates offered on those are also important for investors. So I have to keep both in mind and I have to compete with the latter segment more. Because, for the individual, bond rates matter less than the return he is making on instruments like National Savings Certificate and Post Office Deposit schemes. If I reduce my rates, the depositor will simply say, I am going to the post office.
Are you still demanding a CRR cut from RBI?
The CRR cut will help reduce the base rate but, as I said, even if the base rate doesn?t come down, the rates being offered are coming down for individual segments. So the rate curve is moving lower.
What is the picture looking like in terms of NPAs?
I would say the worst is over but many companies are still facing a lack of demand which is continuing to put pressure on asset quality. This is especially true for companies that have no export opportunity.
But restructuring seems to be coming down? Is it because the stock of stressed assets has reduced or is it also because of RBI?s new guidelines?
It is because the stock of assets is over. The guidelines will not change much. The guidelines basically says that you should have an underlying security. That is the right thing to do. I don?t think any corporate should object against that. Security should be 100%, which is right. Under the garb of restructuring, we cannot lend against air. Loans should be backed by equity in order to provide security to the banks.
Banking secretary Rajiv Takru has raised concerns about the quality of loan due diligence processes. Do you agree?
Not really. A lot of these companies were not born yesterday. All these are companies that have been in the banking system for 20 years. If the company has become an NPA today but the loan was given based on an appraisal in 2003 and till 2009 the account was good, then do you say the appraisal was not done properly! So it is always easy to say in hindsight. Even globally there were steel-makers who were darlings of the market till 3 years ago but are now making losses. Can you say that due diligence was not right?
Let?s take the Kingfisher case then, was there enough diligence?
There were shareholders who also bought the stock at R60, didn?t they? It is very easy to say today, but 2 years ago everyone was saying that there are not enough aircraft in India and the country needs more capacity in the aviation space so it was a call that you had to take. Even now when Etihad Airways came to India, they found the Indian aviation business to be very viable. It is easy to say things in hindsight.
In terms of the recovery process on the Kingfisher loan, where do we stand now?
Recovery is going on. There is a long process. We have to approach DRT, which has to give approval. Then there is a recovery officer appointed who has to start the recovery process. You can?t just seize the asset. In case of fixed assets like a villa or a building, banks have to invite bids and then conduct proper due diligence to see whether the buyer is a serious one. It is a long process. So, whatever assets were there (for recovery), which did not need the intervention of the court, have been done. The rest is in process.
More broadly, are you pushing recoveries and upgradations to improve the NPA picture?
Yes, it?s helping, especially in the retail sector. But there is still a lot of stress in the small and mid-corporates due to various reasons. For instance, right now, SEBs are delaying payments. We hear that NHAI has been delaying payments. All this has a cascading effect on contractors and suppliers. If an alcoholic beverages company does not pay the bottle manufacturer, then the bottle manufacturer will not be able to pay back loans. These kind of issues can lead to companies becoming NPAs.
Are we likely to see you stay on for another term at SBI?
That is not for me to decide. The letter that I have says my term is till September 30, 2013. So I am going by that. I have spent 39 years at the bank and two and a half years as bank chairman. I think that is reasonably good time for someone to make a difference.
For full interview, visit http://fexp.in/qEE21707