Overall reduction in interest rates required: SBI

Inflation is still a major challenge that India has to tackle without perhaps raising interest rates and compromising on growth. Pratip Choudhuri, Chairman of State Bank of India feels that in order to see sharp dramatic reduction in the interest rate for home and consumer finance, there should be a reduction in the overall interest rate.

Speaking to NDTV Profit’s Ira Duggal at the World Economic Forum in Davos, Chaudhuri said that the policy rates or OMOs do not have a lasting impact on the interest rate environment; however it is important that they come down. "

Commenting on India’s potential to achieve its growth target, he said, “7 per growth is easy if there are no credit constraints.”

Below is the complete interview.

 What is your impressions on what you've picked up on the global scenario in 2012?
 

The scenario is that the world will grow at 3 per cent on an aggregate but there would be divergences. Some economies would grow at 6 per cent; some economies would grow at 7 per cent. The world leaders feel that if only this 3 per cent could be pushed up to 4 per cent, it would make a huge difference. So all the discussion and debate was about how do go about doing that, push this growth from 3-4 per cent.

 Do you get the sense that at least right now things are a bit calmer whether you look at global markets?
 

Yes! Global market is a very varied place. In fact, all the worries and tensions are concentrated on the European market, where there are not so much worries about Asian and even for the American one. So a lot of concentration and lot of discussions is centered around Europe in Davos here.

 What is your sense in terms of the possibility of the European situation to disrupt even the emerging markets? Would you be careful of that risk?
 

This risk has to be managed because more than ever before the world is interconnected today. So anything happening anywhere would affect everybody. So the issue is that nobody can shut himself in a room and say that I am not going to worry about what is happening in the rest of the world. So whatever happens, for example, even if you take this lightly dim view that in Europe that is fiscal consolidation and the incomes and the benefit payments drop, then it would reduce the expenditure of the common people and that could affect the demand particularly on consumer goods be it from India, be it from China, be it from Honduras, be it from Bangladesh or wherever. 

Europe is a 14 trillion economy, so everybody is right now focused to make sure that Europe does not take over. In Europe, there are pluses and there are minuses, there are countries with relatively good fiscal balance and there are countries that are not. So, the issue is how do you transfer the liquidity and how do you transfer the fiscal surpluses into fiscal deficit.

The other worry that was there, more specific to the banking system, was the possibility of a credit crunch coming up. A lot of Indian companies have been borrowing abroad. Do you see those fears have been subsided a bit?
 

At the global level, there is more capital available now than in 2008 and secondly the bankers, the Central Bank, the companies have gone through the experience of 2008. So they are at a better position. Regarding a concern that is very right that you know it could lead to it because India imports a lot of things from Europe. However, my understanding is that European bank at least will keep supporting their customers. 

So to the extent the imports are from Europe to India, the buyers' credit or the credit available for that would not shrink. But it was very farsighted on RBI that did away with the sealing of like about 200 plus on buyers' credit, that was very timely, that has been very good because if we did that, if we bring back the sealing again the whole demand and supply would go under. So let the market find its place in terms of pricing. But whatever even if the European Banks deleverage regarding Indian assets, i don't think it should be on the trade credit side but yes for the long term asset side, which are non-European assets. They may try to sell off some of those.

You have seen European banks reduce their operation in India and people are saying that's one reason that there are severe liquidity crunch we are going through. You have seen a pull-back on large international European banks.
 

I think a liquidity crunch in India has two aspects. One is the borrowing of the government, which is crowding out some of the private sector debt and even the RBI has mentioned that. Secondly, it was the RBI's action in the currency markets. So they, I think, supplied a lot of dollars because the rupee was undergoing very fast depreciation and in the process they sucked in rupee only.

So the CRR cut should help in that...

The CRR cut has been very timely and remember the second half of the financial year is also a busy season and that is the time, demand for credit in India is relatively high.

 So since we are talking about that, are you anticipating at least a 100-150 bps fall in interest rates back home in India during next fiscal?
 

That is difficult to predict right now but the CRR cut that has happened. If it is followed up by another CRR cut, then I think the interest rate will soften, which all of us want. To my mind, the policy rates or OMOs do not have a lasting impact on the interest rate environment because they tinker only on the periphery whereas the CRR what it does is, it distributes liquidity right through the system. So it’s more secular, more inclusive.

 So for the average consumer, lending rates may not fall very steeply right now?
 

See, what CRR cut has done, it has reduced the short term rates. To that extent, it would reduce first the interest rates for corporates but for average consumer, if you talk of your home loan or an auto loan, these are long term. Now banks can reduce their interest on long term only after the interest on long term deposits is reduced. 

We encounter several rigidities in this process because the small saving rates is something like 8.5 per cent, the mutual funds positioning, fixed maturity plans that are offering 9-9.2 per cent, there are tax-free bonds at 8.3 per cent. So there are whole lots of other competing instruments and if the bank pricing of deposit goes below that, then there is a possibility that deposit might flee away. So, banks are slightly precluded from reducing the rate sharply. So in order to see sharp dramatic reduction in the interest rate for home and consumer finance, we need to see a reduction in the overall interest rate.

Is there now an upside bias on savings deposit rate? I know that large banks like you and large private banks haven't moved yet but have you seen any shift which would force you to act on that front as well?
 

Not particularly because we are still have saving deposit almost everybody who wants return put it in the sweep deposit, which is done automatically or can be done on the internet or can be done with a small transaction. So, even though the 7-day deposit in SBI is 7 per cent, we have not seen any shift from savings bank account. Because people see savings bank as a convenience not as an instrument for generating higher income.

There seems to be a lot of worry, surprisingly I have picked it up from global voices as well about asset quality and I think the RBI also talked about it. Could you help us with some perspective on how bad it is compared to historic terms, should we worry about it, should we take corrective action, how SBI is tackling, I know you've had a couple of tough quarters.
 

No. In fact, we are not at all stung by the criticism; it is if people talk about asset quality. In fact, it leads us to think. So we are very happy that this conversation and dialogue happens on asset quality. In fact, it helps us to again re-visit out asset quality portfolio. We have seen that agriculture portfolio of SBI has improved but there have been some softening and possible losses in the mid corporate portfolio. 

If you see the textile industry, none of the textile companies have a market cap of Rs 2000 crore. So there are issues in the textile companies, so they are encountering temporary problems. But the thing to remember in asset quality is that if a company is non-performing today, it doesn't mean this is the end of the road. It’s quite possible that in another three months, six months, year or two, it can work its way out of the problem.

But in terms of large, the power, the airlines exposure is very chunky particularly power, those chunky exposures, one goes bad and there is a sudden jump up in your ratios.
 

No, power exposure is very good. Our exposure is largely to AAA companies like NTPC, Power Grid, and Tata Power. We don't see any worries there and we have not lent very significantly to the state power transmission companies. But in the state power transmission companies, there is awareness that the power has to be priced right. 

The days of free power and cheap power cannot continue for long. They are doing that but what has transmitted to the banking system is that some of these state power transmission companies. The electricity companies are possibly delaying payments to their suppliers. So the industries in the cable, transformer and transmission tower, they are having, they are experiencing a lot of delay in realizing their debt. So that is affecting the asset quality of this kind of companies.

What's your priority for SBI?

See 7% growth could not be something that'll be disappointing. The 9 per cent growth that came up to my mind happened due to very cheap pricing for several resources. So, now that the resources are priced better even 7 per cent growth is good enough. What we are trying to avoid is concentration in one sector like when I came the concentration or may I say obsession was only for home finance. Now that may be good as a penetration strategy but a universal bank like SBI should not be a monolayer and our strength and our resilience comes from risk-diversification. So that should continue. We should be strong in consumer finance, we should also be strong in infrastructure, project finance, industrial finance and we should spread our past year turn-over exposure across all sectors, across all spectrum.

What about providing international banking services? I believe you are making some moves in UK in particular…
 

See, international banking is largely wholesale but for SBI, but we are making some moves in the retail areas because in the last 5-6 years we have done reasonably well in retail financing, particularly in the home and in the auto finance sector. So we thought this is the time to take this expertise overseas. Our initial experience in Singapore has been very encouraging. So that's why we were trying to see whether it does well in UK. But retail would not be a very significant part of the international operations. But having been there for so long, it is important to engage particularly with the Indian diaspora in a more meaningful way.

 What do you think are the key positives and key negatives for India in 2012 and what's your base case scenario? How the year will shape up for the economy and the banking sector?
 

Indian positives are that the banking system is very strong, there is no credit crunch and the Indian industry and entrepreneurs are on a growth path and demand for almost everything is growing. So there is no demand constraint and if there is no credit constraint, then 7 per cent growth will be easy. But what we should avoid is, we should not think India can grow in sleep. 

Therefore, just because we are having good growth does not mean that we do follow food and fiscal and monetary policy. So as of now, I don't see a very significant concern or worry with India. Domestically, we were worried about the fiscal deficit but the overwhelming feeling in Davos is about we doing too much of a fiscal tightening within a very short period and the consequences could be worse.