Current account deposits, retail asset quality challenges for new SBI chair

Maintaining loan growth momentum, protecting margins may not be easy as interest rate cycle changes

The banking system in India is healthy, well-capitalised, and bad loans are under control. State Bank of India (SBI)—the country’s largest lender—reflects this robust health of the system, reporting a net profit of Rs 61,077 crore in 2023-24, following Rs 50,232 crore in the previous year. The gross and net non-performing asset (NPA) ratios stood at 2.21 per cent and 0.57 per cent, respectively, as of June 30.

Challa Sreenivasulu Setty, who takes charge as the chairman of the country’s largest bank on Wednesday, still has to address a few challenges.

The first is deposit growth, particularly the share of current and savings account (CASA) deposits, which are low-cost deposits.

SBI’s deposit growth was 8.18 per cent year-on-year until June 30, significantly lower than the loan growth of 15.39 per cent. The CASA deposits scenario is even more concerning, with growth at a mere 2.6 per cent year-on-year. Term deposit growth was 12.2 per cent.

Moreover, the new chairman may need to prioritise the growth of current account deposits. Current account deposits reported a negative growth of 4.64 per cent year-on-year until June, while savings account deposit growth was 3.76 per cent.

“While SBI was able to defend its overall deposit market share over the last 5 years at 23 per cent, the CASA deposit share has fallen by 200 basis points (bps). Within CASA, the current account market share has fallen more, by around 310 bps,” said Rikin Shah, vice president, research, IIFL Securities.

“The problem for SBI is that they are unable to catch up with the SMEs in getting their businesses, where the private banks were able to deepen their relationships. Hence, private banks' current account market share has been rising. Any large or mid-corporate today is very focused on not leaving any funds idle. If they have a sizable amount, they will put it in liquid funds rather than parking it in their current account. So a bank needs to offer more solutions and deepen its relationships with SMEs,” Shah said.

Most banks are facing pressure in mobilising resources as credit demand remains robust, and surging equity markets lure investors to put their money in the stock market rather than in bank deposits. According to the latest data, bank credit growth was 13.6 per cent year-on-year until August 9, while deposit growth was trailing at 10.9 per cent.

The challenge to raise resources is more acute for SBI in overseas territories. SBI is one of the few Indian lenders with a large foreign presence.

Advances from foreign offices of SBI were Rs 5.53 trillion as of June 30, while deposits were only Rs 1.98 trillion. Overseas advances grew by 14.41 per cent year-on-year until June, while deposit growth was 10.48 per cent. The credit-deposit ratio from overseas operations is almost 280 per cent.
 

One of the biggest achievements of outgoing chairman Dinesh Khara was reviving the growth momentum of SBI. In the last two years, SBI’s loan growth has been more than 15 per cent. The healthy loan growth, in addition to improving asset quality, drove earnings growth for SBI.

One of the challenges for the new chairman will be to maintain this healthy loan growth, which is key to retaining market share.

“The biggest challenge for SBI is going to be maintaining the loan growth momentum. Earnings growth is expected to come from loan growth. After a long time, we are seeing SBI growing at the industry level. Earlier, they used to grow lower than the industry and were losing market share. Keeping up the loan growth momentum will not be easy,” said Asutosh Mishra, head of research, Ashika Stock Broking.

The interest rate cycle, which is on the cusp of turning, will have consequences for net interest margins (NIMs). NIMs were under pressure in the last year due to deposit re-pricing. SBI’s NIM was 3.22 per cent in Q1 of FY25, down from 3.33 per cent a year ago. The cost of deposits from domestic operations increased by 45 bps to 5 per cent in the last year, while the yield on advances rose by only 5 bps to 8.83 per cent.

“We are entering a declining interest rate scenario. Home loans constitute a major part of SBI’s loan portfolio, and they are linked to the external benchmark, which is the policy repo rate. Any change in the repo rate will immediately change the home loan rate and exert pressure on the margins. Deposit rates come down with a lag,” Mishra said.

Of a total loan book of Rs 38.12 trillion as of June 30, the home loan portfolio of SBI is almost Rs 7.4 trillion, nearly a fifth of the total.

With the asset quality cycle peaking in FY18, SBI also benefited as gross NPAs, as a percentage of gross advances, fell from 4.98 per cent at the end of FY21 to 2.21 per cent at the end of June 2024.

However, there are early signs of pressure on the unsecured loan portfolio, which could become a challenge going forward.

“Retail asset quality has started to deteriorate, particularly within the unsecured segment. Even if SBI says they give loans to government employees, their NPAs have shot up from 70 bps a year ago to 100 bps in unsecured personal loans. The stress has gone beyond small-ticket personal loans to large-ticket ones. The worry is, there is significant stress in SBI Card. There is a 50 per cent overlap between SBI Card and SBI customers. So if SBI Card customers are facing stress, it is not unlikely that they will face difficulty in servicing SBI loans,” said Shah of IIFL Finance.

Addressing the business community recently, Reserve Bank of India governor Shaktikanta Das said India is at the threshold of a major structural shift in its growth trajectory, moving towards 8 per cent GDP growth in a sustained manner.

It remains to be seen if SBI, under Setty, who will have a three-year term, can ride the economic cycle and take SBI to new heights while navigating some of these challenges.