'A little slowdown is more than desired'

Q&A/ O P Bhatt

State Bank of India raised over Rs 16,000 crore through a rights issue in March, despite the global financial turmoil that knocked its shares down by nearly a third during the offer period. Chairman O P Bhatt talks to Abhijit Lele and Sidhartha about the bank's future fund-raising plans and the trade-off between growth and inflation. "We have put corporate financing on the fast track," Bhatt says. Excerpts:

How is the recent rise in inflation going to affect interest rates and your business?

High inflation is not unique to India. It's a worldwide phenomenon. In Robert Mugabe's Zimbabwe, the rate is in the thousands. Inflation is higher because commodity prices are higher. There are multiple factors in agriculture. There is drought in Australia, there is more demand for food and there is bio-fuel. The government has taken some steps and it will have an impact in the short term. It is also trying to put in place policies that will lead to a second green revolution. There is a need to get investment in agriculture through irrigation facilities and other such steps. But predicting how interest rates would move is like crystal ball gazing.

There is an argument that growth will be moderated by higher interest rates. But we must remember that despite the economic progress, inflation hits the poor the most. There cannot be a pause on growth, but perhaps you can go a little slow on it. We are watching the situation and will take a view after the monetary policy.

Are you seeing a slowdown in demand for credit because of the higher interest rates?

The issue is whether a slowdown is desired or not. My sense is that a little slowdown is more than desired. Please remember no one is talking about a negative growth. Infrastructure and the allied sectors are doing fine and there has been no impact at all. There is some impact on personal consumption because of the sombre mood and expectations of lower hiring and some firing. As far as industry is concerned, people may not plan further capital expenditure for three months or so, but there will be no impact on earlier sanctions and disbursals.

With consumption growth rate dipping, corporate profits may be under pressure and there may be some inventory in the pipeline which may result in higher demand for working capital. So I am optimistic. There may be higher risk but it is a business opportunity as well.

How much growth did you see in your advances last year?

The domestic growth was in the region of 20 per cent while the overall growth, which includes the international operations, was 24 per cent or so.

You have talked about a focused lending approach through groups for large corporate, SMEs and mid-sized corporates. What has been your experience?

The Tatas just wrote to us about our service and we are getting a good feedback even in the mid-corporate segment. But more needs to be done to make the model sustainable. The idea was that the product and service needs of a large corporate were different from an SME's. So, if you do not distinguish, then there will be gaps and you will lose business. The idea of the large corporate group was to give more focus to sectors like oil and steel. The mid-sized and small companies have pure banking needs, while the mid-corporates need services like structuring a $100 million derivative.

Till October-November, we were refusing business to mid-corporates. But after November, it has grown by Rs 20,000 crore. The move has been good for the bank and now we are integrating mid-sized and large corporate customers in the backend. So, there will be common services like cash management, factoring, forex and treasury products. We are calling it the wholesale banking group and my board has asked me to deal with it myself. But whatever be the business, the whole focus has to be customer, who has started feeling better.

So, are you hiring a consultant?

No we will do it internally. There is no readymade solution. You have to feel it, exercise your judgment and, if needed, even do a course correction. In fact, there are many companies which have now approached us to adopt a similar strategy.

There is a lot of talk on derivatives. What has been your experience?

All our deals are only with our 300-400 customers and every transaction has an underlying transaction. In our case, all customers are honouring their commitment though some of them have lost money. We have no profit or loss because our range was not aggressive.

You have just raised capital through the rights issue. How much more capital do you need?

I will immediately use Rs 4,800 crore to fully provide for Accounting Standard 15 requirements and will not wait to amortise it over five years. We have also decided to chip in at the group level wherever there is a shortfall. Then, we will need capital to meet the Basel II requirements. We have an M&A strategy too. As you know, we recently acquired Global Trade Finance (a factoring company) and we will take it public essentially for price discovery. We need capital to grow our life insurance business which is growing quite fast. We are venturing into general insurance and are awaiting permission for custodial services business with SocGen. The cards business may also need some capital. With the present round of fund raising, I am comfortable at the moment. We are reviewing our capital plans and may be okay next year too.

What about the merger of associate banks, since the merger of State Bank of Saurashtra is held up?

We should not look at it as a merger of associates. It is restructuring of State Bank group's business because we own 75 per cent or more in all associate banks. Legally we own these banks, so can't we decide the way we want to deal with them and structure them? The State Bank of Saurashtra issue is pending with the government. Once that is done, we will look at the others. Once the first merger is completed, it will establish the processes. There will be some issues which we will sort out for the other banks.

SBI's business and profit per employee are still among the lowest in the industry.

We have branches in some of the most inaccessible areas, and 4,000 branches give us only 7-8 per cent of the business. These branches were opened not for business interests, but for social reasons. The cost per employee in these branches isn't substantially different (barring city compensatory allowance) from my urban branches. But if you take only our metro-urban branches, we are equal to or better than the best in the industry, both in business per employee as well as profit per employee. People forget the huge social service that SBI does. Which bank has branches in places like the Andamans?

There are some legacy issues. But with 14,000 branches and 8,000 ATMs across the country, we are way ahead of the others. We hardly opened any new branches in the last few years (the maximum was three in a year). But things are going to change. Look at Parivartan, the programme that was launched involving 200,000 employees of SBI. Despite the cynicism in certain quarters, it has worked for us. We are planning a different version of Parivartan to keep the energy going.