Credit growth is not sustainable

Q&A: A K Purwar

A K Purwar

The Cabinet last week cleared the amendment to the SBI (Subsidiary Bank) Act, 1959. Once it is cleared by Parliament, the associate banks will be able to tap the capital market and the parent, the State Bank of India, will unlock their value in a big way. In an interview with Business Standard, SBI Chairman A K Purwar outlines the road ahead for the associate banks as well as the State Bank of India and expresses his concerns over the phenomenal credit growth. Excerpts:

What does the Cabinet approval for the SBI (Subsidiary Bank) Act amendment mean for the State Bank of India?

At the moment, there are restrictions on the ownership of the shares of the seven SBI associate banks and none can own more than 200 shares. The paid-up value of the shares, too, is high "" Rs 100. Today the paid-up capital of these banks is as much as their authorised capital. This means that there is no headroom for raising further capital.

Some of the associate banks badly need capital infusion but the only way to do this is to make more profit and plough back the profit to raise their net worth and proportionately raise Tier II capital in the form of debt. These banks are growing at over 30 per cent annually and, therefore, their capital requirement is huge. The amendment to the Act will enable these banks to raise capital which, in turn, will help them grow assets.

Now, shareholders will be allowed to own as many shares as they want as the cap on 200 shares is being waived. Similarly, once the par value of the shares comes down from Rs 100 to Rs 10, retail investors will find it convenient to subscribe to these shares.

All seven associate banks collectively form the second-largest bank in the country. They have strong regional identities, a committed customer base and they have already been put on the core banking platform. Over the past four decades, an enormous value has been created in these seven associate banks. We will unlock this value now.

Of the associate banks, State Bank of Patiala, State Bank of Hyderabad and State Bank of Saurashtra are unlisted. When do you plan to list them?

Within two to three months of the passing of the amendment to the Act. In some of the associate banks, we will unload our shares in the market, while in some others we will issue additional equity. It will be a combination of offer on sale as well as expansion of equity. We expect good valuation for all these banks.

Does this mean that the proposal for merging associate banks with the SBI is permanently shelved?

That is not our intention. We have not merged these banks (with the parent) but if you look at the ground reality, for all practical purposes there is a virtual merger between the parent and the associate banks. We have a common technology platform, business process and accounting standards and highly co-ordinated treasury operations. Listing of their shares does not mean that we are ruling out the possibility of mergers. They will continue to be a part of the State Bank group and if there is a requirement of a merger, it will be done.

Consultancy firm McKinsey started the business re-engineering process for the bank three years ago. Has this been completed?

Oh, it has been a great success. We have taken out the mid-corporate business from the bank and started treating it as a bank within the bank. This segment has recorded the fastest growth among all businesses and it is now the largest business segment of the bank. We have also carved out three other units "" agriculture, small and medium enterprises and retail business.

The back-end credit process in 83 large cities across the country has been centralised. It has resulted in faster sanction of credit proposals, better documentation and, most importantly, better quality of credit. We expect to cover the top 300 cities over the next two years. This will certainly help us grow our market share.

What is the share of retail business in the overall business of the bank?

Retail business accounts for about 27 per cent of the total business and we want to maintain this level.

What's your credit growth this year?

It's about 28 per cent.

Is it sustainable?

No, it is not sustainable. It has to slow down. We have been experiencing over 25 per cent credit growth for the last two years. This kind of credit growth is not permanently sustainable. There has to be a process of consolidation. This growth gives sleepless nights to a bank chairman. The only saving grace is that the credit is so highly diversified that the risk is well dispersed. Now we must focus on consolidation.

Do you feel that seeds of NPAs could be sowed now?

It could be. We have to be extremely careful about the quality of our assets. In SBI, the maximum focus today is on the quality of assets. Our gross NPA by the year end will be around 4.5 per cent and net NPA less than 1.7 per cent.

Is your technology platform ready?

We have computerised all our branches and 2,700 branches of SBI have been put on core banking. In the group, over 7,000 branches have been put on core banking. This is the largest core banking network in any part of the world. By March 2007, all 14,000 branches of the SBI family will be covered by the core banking project.

Then you'll find a large chunk of the staff becoming surplus. Will you offer them VRS?

There will definitely be surplus staff but as we have gone heavily into distribution of insurance, mutual fund and retail banking products such as credit cards, the surplus employees will be redeployed for distribution and marketing of these financial products. There is no need to offer VRS to anybody.