When Pratip Chaudhuri completed one year in April this year as Chairman of State Bank of India (SBI), his leadership came in for praise from none less than the then Finance Minister Pranab Mukherjee. A man who with his observations has flagged debates on key issues, Mr.Chaudhuri is heading the bank at a time when economic growth is slowing down and the deteriorating asset quality of banks is becoming a major concern. In an interview to The Hindu, he spoke on a wide ranging issues. Excerpts:
How do you see the banking scene in a year from now, particularly for SBI?
Banking sector has a very promising future because Indian people are quite savings-oriented. Our rate of savings is 30 per cent and if you reckon the GDP at about Rs 80 lakh crore, about Rs 24 lakh crore gets saved. The acceptability and faith in the banks is enormous. As banking habit spreads, banks will have to go closer to the people. I think SBI is uniquely positioned to harness and benefit from the savings of the people and their faith in the system. The growth of SBI should be very good and I think it should be ahead of the average growth of the banking industry.
Moody’s has said it remained negative on the outlook for Indian banks over the next 12-18 months. How do you respond to this?
Rating agencies always have to highlight the downsides and pitfalls. Tell me in which part of the world the rating agencies have said that banks are going to have a great time. They would have their own reasons for saying what they have said. When talking about Indian banking sector, it is not very homogeneous. So for Indian banks, the asset quality, profitability and net interest margins are significantly different from one bank to another. Each bank could be an out-performer or under- performer.
Private banks are faring much better than public-sector banks. What ails state-run banks?
They came with a great advantage from day one as they had core banking, whereas public sector banks have legacy issues. But some thought public sector banks will simply vanish. That has not happened. Public sector banks have also got their act together and all of them now have core banking. In SBI, one great advantage is that we are a pan-India bank. But some of the public sector banks could be seen as confined more to certain geographies. They have to become more all-India banks. There is enough operational freedom and public sector banks can excel in the areas they want to.
Public sector banks are largely relying on bulk deposits which are having a share of 25 to 30 per cent. That is not good in the long run. These deposits are price driven and I call them ‘lazy deposits’. We need to strengthen our deposit franchise. SBI’s bulk deposits form just 1.5 per cent of total deposits. Banks must re-double their efforts to get retail deposits and shun high cost bulk deposit to the extent they can. Public sector banks are value creators. Government borrows at an average of 8 and 8.5 per cent from the market and all the public sector banks are giving a return on net worth of something like 13 to 16 per cent. Thus, Government’s investments are fetching a return higher than its cost of borrowing.
The RBI has expressed concerns about asset quality of banks. How serious is this in the coming days?
It is very difficult to predict the future but there exists a problem. There has been a slowdown in the economy and the rate of interest in India is generally higher than what it is globally. Indian companies have to pay a higher amount as interest. Now certain demand restrictions or slow down is showing up. For example, a major commercial vehicle manufacturer is shutting down the plant for three days. It cascades down to other industries. A continuously high fuel and power prices are also hurting. Since the banks lend to all segments, they will have the share of problems in their asset quality.
SBI is the biggest lender to Kingfisher Airlines.. Are there any lessons learnt?
We still think Mr. Vijay Mallya would live up to the hope. It’s a question of time. In the ultimate analysis the company has to revive itself. Banks can only support, which they did. I think even now Mr. Mallya can do everything possible to revive the airline. Maybe you can say that we are slightly disappointed with the speed with which it is happening. A meeting of consortium of lenders is taking place on December 18 and we expect the company to give us their thoughts about their plans for revival of Kingfisher Airlines.
The RBI’s monetary policy review is on December 18. Do you think it is time to cut interest rates?
I would in fact hope for and recommend a 50 basis points cut in both Cash Reserve Ratio (CRR) and in repo rate. That would have a soothing effect on the economic environment.
The RBI had de-regulated the savings bank rate. But public sector banks kept this rate at the same level, whereas some private sector banks hiked the rate?
I would not comment on others. But for us savings bank growth is phenomenal. We have not been dented by increase in savings bank rate by some of the smaller private sector banks. We have a huge distribution network. Even if these banks offered higher savings bank rate, how many people they have reached out to? Secondly, if return is the issue we offer a 6.5 per cent return on a seven-day deposit. So we think that saving bank is not an instrument for return maximisation. Savings bank is an instrument of convenience for payments. We have done a number of things outside the deposit rates. We have made multi-city cheques available to all customers at no extra cost. We are now running a scheme that for Rs.100 annual premium, a person gets Rs.4 lakh accident insurance. Similarly, we have done away with minimum balance charges. These banks which are paying higher interest rates have very stiff minimum balance requirements, which we think is not egalitarian. If we want to pay higher rate to the high value depositors, that if their balance is more than Rs.1 lakh on an average, then we will have to lower the rates we paid to our lower balance depositors. At this moment we are not inclined to do that. The message we are getting from our depositors is that rate is not very important issue for them to maintain the balance. It is the experience, service, and other facilities like locker, which are also important.
You championed for abolishing CRR … . Do you think CRR has lost its relevance?
In a debate or discussion there should be space for all views. My position was that CRR is being unfairly slapped on banks. CRR is a monetary instrument. Let it be imposed on all those financial intermediaries who are mobilising public savings, insurance and mutual funds. For example in Germany there is a CRR on insurance and there is a CRR on banks, the same one per cent. Second thing is that if it is an inflation fighting instrument, CRR has to go to 20 per cent. I have no quarrel with that. Let it be 20 per cent, but give me interest. If neither is feasible then CRR should be phased out. But I am grateful to the RBI that over the last two years, CRR has been brought down significantly, from 6 to 4.25 per cent. And see the benefit… most of the banks have reduced their base rates. Today our home loan rate of interest is 10 per cent and this was possible with the reduction in CRR.
What’s your estimate for profit and revenue growth for SBI in 2012-13 in percentage and absolute terms?
Last year our profit was Rs.11,700 crore and this year in the first half we have done about Rs.7,400 crore. So Rs.15,000 crore, as of now, looks a reasonable possibility. This will translate into 32 per cent increase.
Currently, growth drivers for SBI are retail, home, car loans and SMEs. The pipeline for corporate loans looks very dry. We think home ownership in India is much less than what it needs to be. Lot more number of people need to move into their own homes and to become home owners. So home would be our largest, SMEs and possibly exports.
Do you see any possibility of mergers in the banking industry in the near future?
Economic rationale for merger is very strong. Even within SBI we have merged two associate banks. We would like to merge the remaining also. But in SBI, the issue is each merger costs about Rs.1,000 to Rs.2,000 crore, because the associate bank’s terms and conditions of service have to be brought to the level of SBI. Once we are comfortable with capital, we can undertake that expenditure. Right now we are only looking at merger with our associate banks. This is much easier to implement and carry forward. A merger would take about two years to digest. Therefore, for SBI, one bank every two years.