 "Repo rate cut is meaningless: Pratip Choudhuri")
Four days ahead of the monetary policy, State Bank of India Chairman Pratip Chaudhuri says a one% reduction in the cash reserve ratio will allow the bank to cut lending rates by 20 basis points. In an interview with Manojit Saha, he also explains why he thinks a repo rate cut is meaningless and why the bank is planning to withdraw from giving performance guarantee to traders and contractors who are doing road projects for state governments. Edited excerpts:
SBI’s 21% loan growth in the last financial year is higher than the industry average. What will be your growth strategy in the next six months?
Growth in the first half is always slow, particularly from the corporate side. So the emphasis will be on retail, mainly on home loans. Our home loan processing capabilities have improved vastly and the increased number of tieups with builders has helped. In the next six months, the focus will also be on increasing the physical strength. We tried to open 1200 additional branches but opened about 750.. We did a massive recruitment in November-December and added about 20,000 people. In the next six months, we plan to open 600-700 branches. We expect 25-30% growth in home loans. This is a de-risked model, and our loan-to-value ratio is 70%, so it does not consume a lot of capital.
Our large corporate book grew by 32% in the previous financial year to Rs 1.65 lakh crore. The NPA in this sector is close to 1%. Our loans are mostly secured. When companies have unleveraged fixed assets, we have encouraged them to come for loan.
SBI was expecting healthy recovery in the fourth quarter? Has that been achieved?
Our March-end NPA should be lower than what it was in December. There has been a good cash recovery, including that from written off accounts. That income adds to the bottom line. Last fiscal, recovery from written off accounts have increased to more than Rs 1000 crore as compared to Rs 700 crore of the previous year.
The one business we may withdraw from is the performance guarantee business to traders and contractors who are doing projects for state governments. NHAI (the National Highways Authority of India) is not getting paid on time. There are unscheduled disruptions in these projects. The underlying asset structure is also relatively weak. The risk of default on such guarantees has become more pronounced. For example, the road projects need repayment cycle to start from a certain date. If the toll collection does not happen as scheduled, RBI calls them restructured assets, which increase the provisioning requirement.
Deposit growth was sluggish in the last couple of years. What will be the strategy to beef up deposit mobilisation?
One thing is sure -- we will not go for expensive bulk deposits. We will keep focusing on retail deposits. It would also depend on RBI, if they cut the cash reserve ratio, then deposit pricing would head lower.
Today bank deposits are at a disadvantageous position as tax-free bonds, liquid mutual fund scheme etc get superior treatment. I have been requesting RBI to reduce the minimum fixed deposit tenure to three days from the existing seven days. If someone thinks seven-day deposit is more stable than three days, then that is not the case. Why should bank deposits get the worst possible treatment? Due to all these, bank deposits are losing out to other schemes, as a result the pool of savings is getting reduced. In addition, with this kind of inflation, it is also time to cut the CRR by one%. That can take care of so many liquidity issues without hurting anybody.
Why do you think a repo rate cut is not sufficient for lending rate cut?
Repo rate cut is meaningless because, for example, a one% cut in CRR, will release Rs 12,000 crore for us, and allows me to cut the lending rate by 20 bps while a similar magnitude of repo rate cut will affect the lending rate by 2-3 bps. A cut in CRR will send out a signal of more benign interest rate. That’s what the economy needs very badly.
Your cost income ratio is on the higher side. How do you plan to address that?
Our biggest challenge will be the cost to income ratio which is at 48%. We have to improve the ratio by increasing the volumes since it will be difficult to shrink the cost. Because, if you shrink cost, you cut down on services and you may economise on risk and compliance.
What kind of loan recast pipeline you expect going forward?
Since a lot of clearance happened in the last quarter, we don’t see a huge pipeline. It could be about Rs 3,000 crore. Our restructured book is much lower than other banks, because we never had exposure to state electricity boards.
Banks had a tough time with their exposure to Kingfisher Airlines. What about your exposure in other airlines?
So far as Kingfisher in concerned, we are in the recovery mode and not in revival mode. We have exposure in Jet Airways and Air India, and both are doing fine. Now that Jet has brought in significant equity, there is a possibility that they may pay back some high-cost debt.
What kind of net interest margin you see in 2012-13 and what is the expectation for this fiscal?
Margins are expected to be healthy. We have given a guidance of 3.7-3.75%, we are still holding on to it. This fiscal also we will give a guidance of 3.7%. But it needs to be seen how the margins from international operations pan out. If we get long-term assets from our foreign offices, then the margins will be good. But short-term interest in overseas market is very low. Therefore short term assets are not at all very remunerative. Overall, we still have Rs 40,000 crore to Rs 50,000 crore of extra liquidity. Once that get absorbed, we will be very comfortable in terms of margins.
Is there any concern on the asset quality of retail credit?
We have not seen any adverse impact on asset quality in the home loan portfolio. Non-performing asset in this category is about 1.3%. The moment we give a SARFESAI notice, the individual does everything possible to protect his home.
What kind of capital requirement the bank will have going ahead?
We expect to close the previous financial year with 10% capital adequacy ratio. The government holding is 63%. If there is a huge demand, then only we will need additional capital. There are a number of options. We can go for a rights issue, we can go for a follow-on offer.
What is the plan regarding merging one of the associate banks?
We will look into the issue in the second quarter. Capital raising and subsidiary merger should be seen in context. Subsidiary merger costs about Rs 1200 to Rs 2000 crore, depending on the size of the bank, because the salaries and the pension provision for employees have to be brought up to the level of SBI.
SBI’s 21% loan growth in the last financial year is higher than the industry average. What will be your growth strategy in the next six months?
Growth in the first half is always slow, particularly from the corporate side. So the emphasis will be on retail, mainly on home loans. Our home loan processing capabilities have improved vastly and the increased number of tieups with builders has helped. In the next six months, the focus will also be on increasing the physical strength. We tried to open 1200 additional branches but opened about 750.. We did a massive recruitment in November-December and added about 20,000 people. In the next six months, we plan to open 600-700 branches. We expect 25-30% growth in home loans. This is a de-risked model, and our loan-to-value ratio is 70%, so it does not consume a lot of capital.
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What’s the strategy for large corporates?
Our large corporate book grew by 32% in the previous financial year to Rs 1.65 lakh crore. The NPA in this sector is close to 1%. Our loans are mostly secured. When companies have unleveraged fixed assets, we have encouraged them to come for loan.
SBI was expecting healthy recovery in the fourth quarter? Has that been achieved?
Our March-end NPA should be lower than what it was in December. There has been a good cash recovery, including that from written off accounts. That income adds to the bottom line. Last fiscal, recovery from written off accounts have increased to more than Rs 1000 crore as compared to Rs 700 crore of the previous year.
The one business we may withdraw from is the performance guarantee business to traders and contractors who are doing projects for state governments. NHAI (the National Highways Authority of India) is not getting paid on time. There are unscheduled disruptions in these projects. The underlying asset structure is also relatively weak. The risk of default on such guarantees has become more pronounced. For example, the road projects need repayment cycle to start from a certain date. If the toll collection does not happen as scheduled, RBI calls them restructured assets, which increase the provisioning requirement.
Deposit growth was sluggish in the last couple of years. What will be the strategy to beef up deposit mobilisation?
One thing is sure -- we will not go for expensive bulk deposits. We will keep focusing on retail deposits. It would also depend on RBI, if they cut the cash reserve ratio, then deposit pricing would head lower.
Today bank deposits are at a disadvantageous position as tax-free bonds, liquid mutual fund scheme etc get superior treatment. I have been requesting RBI to reduce the minimum fixed deposit tenure to three days from the existing seven days. If someone thinks seven-day deposit is more stable than three days, then that is not the case. Why should bank deposits get the worst possible treatment? Due to all these, bank deposits are losing out to other schemes, as a result the pool of savings is getting reduced. In addition, with this kind of inflation, it is also time to cut the CRR by one%. That can take care of so many liquidity issues without hurting anybody.
Why do you think a repo rate cut is not sufficient for lending rate cut?
Repo rate cut is meaningless because, for example, a one% cut in CRR, will release Rs 12,000 crore for us, and allows me to cut the lending rate by 20 bps while a similar magnitude of repo rate cut will affect the lending rate by 2-3 bps. A cut in CRR will send out a signal of more benign interest rate. That’s what the economy needs very badly.
Your cost income ratio is on the higher side. How do you plan to address that?
Our biggest challenge will be the cost to income ratio which is at 48%. We have to improve the ratio by increasing the volumes since it will be difficult to shrink the cost. Because, if you shrink cost, you cut down on services and you may economise on risk and compliance.
What kind of loan recast pipeline you expect going forward?
Since a lot of clearance happened in the last quarter, we don’t see a huge pipeline. It could be about Rs 3,000 crore. Our restructured book is much lower than other banks, because we never had exposure to state electricity boards.
Banks had a tough time with their exposure to Kingfisher Airlines. What about your exposure in other airlines?
So far as Kingfisher in concerned, we are in the recovery mode and not in revival mode. We have exposure in Jet Airways and Air India, and both are doing fine. Now that Jet has brought in significant equity, there is a possibility that they may pay back some high-cost debt.
What kind of net interest margin you see in 2012-13 and what is the expectation for this fiscal?
Margins are expected to be healthy. We have given a guidance of 3.7-3.75%, we are still holding on to it. This fiscal also we will give a guidance of 3.7%. But it needs to be seen how the margins from international operations pan out. If we get long-term assets from our foreign offices, then the margins will be good. But short-term interest in overseas market is very low. Therefore short term assets are not at all very remunerative. Overall, we still have Rs 40,000 crore to Rs 50,000 crore of extra liquidity. Once that get absorbed, we will be very comfortable in terms of margins.
Is there any concern on the asset quality of retail credit?
We have not seen any adverse impact on asset quality in the home loan portfolio. Non-performing asset in this category is about 1.3%. The moment we give a SARFESAI notice, the individual does everything possible to protect his home.
What kind of capital requirement the bank will have going ahead?
We expect to close the previous financial year with 10% capital adequacy ratio. The government holding is 63%. If there is a huge demand, then only we will need additional capital. There are a number of options. We can go for a rights issue, we can go for a follow-on offer.
What is the plan regarding merging one of the associate banks?
We will look into the issue in the second quarter. Capital raising and subsidiary merger should be seen in context. Subsidiary merger costs about Rs 1200 to Rs 2000 crore, depending on the size of the bank, because the salaries and the pension provision for employees have to be brought up to the level of SBI.