At a time when inflows of deposits are slowing down, State Bank of India (SBI) chairman Arundhati Bhattacharya believes banks would be wary of trimming deposit rates for fear of wasting the franchise.
At a time when inflows of deposits are slowing down, State Bank of India (SBI) chairman Arundhati Bhattacharya believes banks would be wary of trimming deposit rates for fear of wasting the franchise. Bhattacharya tells Shayan Ghosh and Shobhana Subramanian it could be a while before demand for corporate loans picks up but loan rates may come down a little if bankers look to create demand. The SBI chairman believes the bank’s balance sheet could grow to Rs 40 lakh crore over the next three years. Excerpts:
How do you read the demand for credit?
The demand for corporate loans is very low and we aren’t seeing a pick-up very soon. Maybe, in the second half of the year, as and when we have more projects and triggers — a good monsoon, good harvest and the seventh pay commission — they should create demand. This, in turn, will hopefully push up capacity utilisation and subsequently investments may come back. But this will take time since there is a lag between the trigger and the fallout. At the start of the year, I had said that loan growth will be 12-13% and I have not been anticipating more. At SBI, we are seeing traction in agri loans, SME loans and the retail portfolio is doing well.
So where is the growth in the corporate loan growth coming from ?
It’s mainly through the refinancing and cannibalising lenders who had lent at higher rates; once projects are complete and the risks mitigated, lenders are willing to refinance them at lower rates. So banks that are able to lend at lower rates will have an advantage. We at SBI already offer the best rates, so we are not in a position to undercut. But there will always be some amount of undercutting given AAA and AA accounts are few and far between.
How do you assess the scheme for sustainable structuring of stressed assets (S4A)?
It is difficult to say as of now since we haven’t really started on them but there are some rules which we think are very stringent. For instance, considering only the current cash flows and current interest rates might make things a little difficult. That’s because most of these companies are paying penal interest rates. And if you are going to take into account only current cash flows, you are not enabling companies to take advantage of the benefits of the lower interest burden and allowing them more working capital to be able to ramp up. That means the haircuts will be very large.
We will take some of these issues to the Reserve Bank of India (RBI) and show them how things look and see how it works. We are quite clear we will do forensic audits because you cannot be taking haircuts without first ensuring the account is otherwise in order. For an S4A both the techno economic viability (TEV) study and a forensic audit are a must.
What is the status on the strategic debt restructuring (SDR) accounts?
We have already classified all the big SDR accounts non-performing asset (NPA). The watch list of accounts with an exposure of Rs 31,000 crore is over and above these. It is important to resolve these accounts within the next year or so because while provisioning is only 15% in the first year, over the next three years we would be required to provide 100%. Some will definitely get resolved and we are working towards it. Our venture with Brookfield for the stressed assets fund should help bring in money from outside adding liquidity to the system.
Do you see deposit rates coming down?
Actually deposit rates should come down but I don’t see that happening because deposit accretion in the banking system is much lower than what it has been ever. No bank seems willing to lower rates. Despite a disinflationary situation, if you are not getting resources, why should you bring the rates down? SBI currently offers the lowest rates and we cannot keep leading the downward cycle. I’m waiting for others to join me before I go further down. The deposit franchise gets wasted if you become too aggressive. We have to be very balanced in our approach and can only bring down rates as the market comes down, it cannot be done unilaterally.
So, does this mean loan rates aren’t really going to fall too much?
Lending rates might come down a little more because on one hand while deposits are also low, lending is also low. So if you are not finding enough takers it will have some downward bias on the lending rate. If your treasury profits remain good there is a little space and we can look at that. But the problem is we have very large provisioning requirement and there’s a bit of pressure on us to ensure we have enough of a margin to make the provisions. Credit costs are still very high.
We go to the corporate bond market when we do not have enough assets otherwise. Obviously the yields in the corporate bond market will be lower than those on advances.
Are public sector banks, other than SBI, ready for fintech or will they cede share to the private sector lenders?
The other PSBs will definitely understand this and will start adopting because they have to adopt. At the end of the day fintech is a revolution or an evolution and unless you get there you will find it very difficult to keep up. We may not be seeing it so much because the PSBs do not much talk about it but there is a lot of adoption of technology going on. They may not be doing it at the pace one would like to see but it is not true that PSBs have their eyes and ears closed and do not understand what is happening.
I am sure they will work out collaborations and find ways to bring technology to their work. If you want to be a leader and to do it ahead of time them you really must have the ability to spend. Also if you are small in size it will be difficult for you to scale up unless you have that kind of spend on technology and R&D.
Now that the merger with the subsidiaries is imminent, where do you see SBI’s balance sheet in about three years?
The merger will take the balance sheet to Rs 29 lakh crore and over the next two to three years we are looking at a balance sheet size of Rs 40 lakh crore.
What are the signs from the rural economy? Do you believe consumption will get a boost if there is a good monsoon?
I think, for the first time, loans in the agri area are showing a good uptick. That suggests the old loans are being repaid and fresh ones being taken for the new season. In the previous two years the repayments have been less, bad loans have gone up.
But rural consumption should get a boost post the monsoon since not all the income will be used to repay loans. Despite the not-so-good monsoon, the shortfall in output last year, compared to previous years, wasn’t more than 5-6%. So while people produced more and repaid loans. they didn’t have too much left over. This year that leftover amount could be higher because production maybe higher. What happens in a year when the monsoon is good is that it recharges groundwater and so the next year too will look better. I think that consumption in the rural areas will start going up.
How difficult it is to deal with the trade unions?
The fact of the matter is that they have still not opened discussions with us. We had gone to the labour commission but they say they will talk only when we put this decision on hold. It is not possible to put the decision on hold, they will have to talk to us. Only when they talk can we do something about it. We believe they should sit down with us and tell us what the problem is because, at the end of the day, they are not losing jobs. Their pay and perks are not going down so why are they striking? You are becoming part of a much larger organisation and your job security is going up.
There should be some rationalisation of branches….
Branch rationalisation will happen but we may not give up any licences. As a legacy bank many of our branches are in the older parts of the cities and towns and not so well spread out in the newer parts. So we will rationalise those branches and take then to newer parts.
So there will not really be any loss of jobs….
You have to understand that we are losing about 13,000 people every year to retirement. So 26,000 people will go in two years and I will not have 26,000 extra people.
Therefore it is not going to impact anybody anywhere and I don’t think there is any issue and therefore the court had also given the injunction. Why should you unnecessarily create customer inconvenience when you are not getting impacted in any manner. If we were throwing a lot of people out of jobs, if we were saying that we will slash your pay and perks then you could talk about such a thing.