Rates to remain benign, corp credit revival likely in 4-6 months: SBI chief

In a Q&A, the lender's chairman Dinesh Khara says the banking system awaits a restructuring proposal from Vodafone-Idea

Interest rates will remain benign for some time as capacity utilisation remains low but the economy is showing definite signs of improvement and revival in corporate credit demand can be expected in four-six months, says State Bank of India (SBI) Chairman Dinesh Kumar Khara in a freewheeling interview with Abhijit Lele and Anup Roy. The banking system is awaiting a proposal for restructuring, if at all, from Vodafone-Idea and there is no major surprise in terms of asset quality, he says ahead of the annual SBI Banking & Economics Conclave on November 16-17, of which Business Standard is the exclusive print partner. Edited excerpts:

What is your expectation from this event, and what the audience can expect?

This has become a flagship event as far as State Bank of India is concerned, and also one of its kind in the industry. We have taken care to identify the subjects that are quite relevant to the country at this point, and our effort is to create a body of knowledge that provides an actionable roadmap to sort out the problems the country faces. The SBI conclave strives to bring diverse viewpoints on the overarching theme of the conclave every year. This year, the theme is the contours of the economic recovery in the post-Covid world. I hope we will have deliberations that will lead to identifying the various dimensions in which the economic recovery can be pursued by all stakeholders in the country. This year, of course, we would have the benefit of the presence of the honourable Finance Minister and honourable Reserve Bank of India Governor as well, which perhaps accords even more credibility to the thought process.

Conferences are held virtually these days, but the country's largest bank is holding a physical event. It almost feels like a statement. Why not a virtual summit?

We are quite cognizant of the health emergency seen since March 2020, and it requires a whole lot of precautions. But, we also acknowledge the fact that over 1.11 billion population has been vaccinated. Of that, 80 per cent of eligible adults have already received the first dose, and 38 per cent, the second. We are trying to put up a demonstrative statement, a small recognition of the resilience of India as a nation, that things are coming back to normal. However, while making the statement, we are quite aware that we should follow all protocols required at this point. We should stay safe while attending this conference.  

In this backdrop, what is your assessment of the economy, and what does resilience mean for credit offtake?

We have seen a definite improvement in economic activity in October. There has been a lot of traction, a significant improvement in monthly cargo and port cargo traffic. Government revenue collections, GST collections — they’re all at a record high in October, even the monsoons have been good and we expect a record kharif harvest. If we can read the signs, October shows a definite improvement in the corporate cycle. As far as the bank is concerned, out credit-deposit ratio improved by two per cent in October itself. I hope the trend is sustainable trend and that economic activity accelerates going forward.  

With the new capex cycle indicators gaining ground, in what way can banks avoid past mistakes of say, the 2008-2013 period, which created a lot of pain and bad debts piled up in the system in the subsequent years?

There were definite lessons from the 2008-2013 period, which all banks have picked up and they have strengthened their underwriting practices based on the root cause analysis. Deficiencies were addressed, and by now, adequate provisioning has been done by all banks. The provision coverage ratio for all the banks would be at least 70 per cent plus. The lessons incorporated into the system have strengthened all the banks, and perhaps the strength of the balance sheet. Improvement in the underwriting practices goes a long way in mitigating the future risks.

There is also a definite change in the ecosystem. We have seen that the Insolvency and Bankruptcy Code (IBC) has made borrowers quite responsible. New opportunities are emerging post corporate deleveraging. The performance-linked incentive (PLI) schemes, guaranteed emergency credit line (GECL) etc. have actually built the confidence of bankers as well.

In the last cycle, when SBI cleared a particular loan or project finance proposal for a big corporate, the other banks blindly followed it. So, what exactly would your message be to peers and fellow bankers as we start the new cycle?  

When we do any appraisal, we evaluate the project in line with our own risk appetite, our assessment about the risk inherent in the proposal, and our ability to mitigate those risks. It is something which is very local to our balance sheet and our perception of the risk. In a consortium, or a vertical banking arrangement, whenever any such a proposal or covenant is shared, there is invariably a caveat that this is something which gives a broad picture in terms of all the risk assessed. But it has to be seen in the context of the risk appetite of the bank that is underwriting the particular proposal. Not all kinds of risks would be suited for all kinds of balance sheets. Lenders should evaluate the overall proposal in the context of their own policies, and also in their understanding of where the risk lies.

Banks are relying on retail credit for growth, but even the RBI governor has warned that they should not overreach. Wholesale credit, however, is not picking up. What’s your assessment?

Retail credit growth has to be seen in the context of available opportunity. Considering that there is elbow room to leverage the additional balance sheets, there is a scope for retail lending. Having said that, one must be mindful of the safety margin available, and the certainty of that safety margin. Second, a very important factor is how effective the collection machinery is. In retail, it matters all the more because it is all spread out quite a lot.

I think all banks that are betting on retail credit look at the loan to value ratio. And they are quite conversant with appraising the value in a very scientific manner. I'd say they have really strengthened their underwriting practices and have leveraged structured and unstructured data available in the ecosystem to improve these practices.

As for corporate credit, it is a function of the capacity utilisation. The improvement in the CD ratio in October very clearly means there is more demand and traction from the corporates as well. If this trend sustains, I’m sure it will lead to working capital utilisation. And beyond a stage, investment demand will come in, which will open up the opportunity for the term loans to be taken from the banking system.

If this demand trend sustains, in terms of an optimistic timeline, we can expect four to six months for a meaningful credit offtake from the corporate side. As of now, the credit-deposit ratio for the system as a whole is somewhere around 59 per cent. There is a huge scope for improvement.

Which are the sectors you’re seeing the credit demand coming from, now and in the immediate future?

As of now, we have seen credit demand coming from the commodity sector. We have started seeing opportunities in the auto sector, and the commercial real estate as well as the logistics sectors. These sectors are showing definite traction for credit to grow. As we move forward, we expect an opportunity in engineering sector, chemicals, food processing, and infrastructure. We have seen some kind of growth in exports, especially textiles. The pharmaceutical sector is also showing good promise, but generally, the pharma sector is not borrowing much from the banking system. But yes, it will certainly contribute as a GDP growth component. We hope at some stage the banking system would have an opportunity to support the pharma sector.

Personal loans will continue to grow. At our bank, on a three-year CAGR basis, personal loans have grown 16 per cent. I hope this demand revival will be led by the personal demand, which will eventually translate into personal loans going well. Real estate sector is back, and housing will be a major sector for growth.

Interest rates may harden now. Do you expect retail loan demand to fall in that case? Will it lead to NPAs because banks have lent so aggressively to retail?

When it comes to housing, interest rates matter, but perhaps over-dependence on the interest rate is not there. Even if rates go up, I don’t think we will see a rapid increase. Rate increase will likely be marginal because capacity utilisation is low in the economy. It will take some time for capacity utilization to increase for the demand for credit to recover. To my mind, it is likely to be a benign interest rate environment for some more time to go.

In the past, we have seen interest rates as a component of the overall expenses for the corporate sector is not very significant. So, an interest rate hike will not have an overbearing impact on the housing or the corporate sector.

Now that we have clear visibility of the upcoming bad bank, how can it address bad loans and how can it truly complement the banks in any meaningful way?

The legacy NPA of the banking system is about Rs 2.2 lakh crore. Banks have transferred 70 assets to the proposed bad bank. As for the structure, it will offer 15 per cent cash and 85 per cent security receipts guaranteed by the Government of India. This should free up the capital of the banking system, which can be further leveraged for credit growth as the economy gets going. The most attractive point of the National Asset Reconstruction Company (NARCL) is the aggregation of NPAs by pulling them under a single umbrella. The aggregation of assets was a major pain-point for the ARCs in the past. Now, once the assets are aggregated, the resolution becomes even faster. The NARCL can draw upon the expertise of their debt management and resolution company. That company will have the benefit of the experts in the specific sectors, who will see that they add to the value. Thereafter, such assets can be monetized through the market mechanism. It is an excellent concept, and it will certainly lead to a situation where the managerial bandwidth of the banking system will also be freed up and banks will look up at new constructive credit opportunities, providing a much-required impetus to create a faster and better recovery through improvement of flow of credit to the economy.

As the largest bank of the country, are you getting a little worried by the rapid rise of Fintech firms? Even big tech entities are offering their platforms for deposit mobilisation?

Our digital strategy is absolutely on track. We are opening 62 per cent of our savings bank accounts through YONO. Given our background as a legacy bank, our digital transactions have risen from about 59 per cent before, to about as much as 77 per cent. We are in a position to leverage YONO to offer non-account holders pre-approved personal loans. We are leveraging analytics in a big way. We are opening accounts, offering loan products, including home loans, gold loans with the help of YONO. In agriculture credit also, we can review our Kisan Credit Card (KCC) loans with the help of YONO. It has also gone overseas and raising liabilities from our constituents spread out across the geography in the foreign countries. We are fully geared up to offer digital solutions to our tech-savvy customers. And we are investing well to ensure we stay ahead of the curve leveraging the artificial intelligence and machine learning (AI-ML) models to strengthen our risk management practices and understanding the customer behaviour, offering them the best suitable products and services. YONO is getting used to offering the products and services of our subsidiaries. We can distribute mutual funds, offer credit cards, life and non-life insurance policies with the help of YONO. So, I think YONO is all pervasive as far as State Bank of India is concerned.

It’s going to be a situation where we’ll have to keep on innovating, so that we stay ahead of the curve. And we have to see how best we can meet the aspirations of the millennials to Gen Z leveraging YONO so that we meet the needs of both modern India as well as Bharat.

But does the entry of Big Tech worry you?

See, I think as the largest bank of the country, we have to be quite cognizant of the ecosystem. So, whatever are the developments in the ecosystem, we have to understand those developments, and we have to ensure that we have enough competence within the bank to take care of all such challenges. It is a one big process for an entity like ours, and I think we have to always keep on thinking about what is happening and how we can come back to such challenges.

Since YONO has matured so much, is this the time to offer YONO as an independent service offering outside the SBI group, and perhaps monetise it?

It is purely on the drawing board as of now. Maybe at some later stage we will consider alternate ways. As of now, YONO is helping us to cut the cost of doing business.

The government’s telecom package has perhaps not just given a relief, but visibility of how things could take shape. Vodafone-Idea, in particular, is seeing some stress. What is the way forward, especially in terms of restructuring?

In the backdrop of this relief package announced by the government, we are awaiting a comprehensive proposal from the company. As far as repayment records are concerned, it is very much in order. But the next course of action will be decided once we review the plan, and we deliberate with other lenders on the subject.

Are the lenders insisting on equity or some investment from the existing promoters or other financial investors for Vodafone-Idea?

Whatever I’ve heard from the media, I think the promoter seems to have some inclination in this direction. Once we see the proposal, we’ll have more reasons to debate and discuss and finalize the stance.  

In the second quarter (Q2), you have been able to pull back a lot of slippages. Can we see something similar going forward, or we can expect slippages from the restructure accounts under the one-time restructuring schemes (OTR)?

Slippages for Q2 were about Rs 4,000-odd crore--just 4.66 per cent of the loans. And if we consider both the OTR plans, the slippages stand at about 1.2 per cent of the total OTR book. They are fully provided for. Our experience shows that default in such a kind of restructuring can reach as much as 30 per cent, which actually turns out to be about Rs 9m000 crore. I'd also like to mention that the behaviour in this restructuring is very different this time, because the restructuring was essentially attributed to cash flow disruptions. We have seen that wherever cash flows have got repaired; the repayments have started coming in. But even in the worst situation, the requirement would be about Rs 9,000 odd crore. We have already provided for more than Rs 6,000 crore in our Covid relief book. If there is some surprise, that will also be taken care of in the subsequent quarters even before the seasoning of this portfolio happens.

So if the economy improves and cash flows improve, can we expect a reduction in the risk of a restructured portfolio?

Yes, I fully agree. This restructuring is more like buying insurance in terms of availability of credit in an hour of crisis. If the economy looks up, the confidence will return and early repayment can also be seen into this restructured portfolio.

We have seen massive haircuts in IBC, even in the case of big accounts. What is your take on this? Also, we have recently seen SREI getting referred under IBC. Do you expect more such big cases going forward?

IBC as a means of recovery is a function of the quality of assets and the market for the brown field. The two important factors determine the potential value ascribed to the asset, and eventually decide the percentage of the recovery. The recovery will actually differ from asset to asset and also depend on the prevailing situation. There was a point of time when whatever iron and steel assets could fetch was beyond anybody’s imagination. If now there is a power shortage, then maybe the power plants awaiting resolution will also fetch similar kinds of value. So, it is case specific, not structure specific.

We have a very large IBC book, but the potential risks, as far as these stressed accounts are concerned, have been fully provided for. This particular stressed account has also been 100 per cent covered. We have affected all the provisions, and tried to insulate the balance sheet from any potential risk. But whatever little comes, I think we will take care of it during the course of the operation.