With the Reserve Bank of India cutting policy rate, institutions are expected pass on this benefit to consumers by offering better rate of interest on loans. Banks are willing to tweak their loan rates and borrowers may find a case for transmission which in turn will boost economic activity, say bankers while speaking to the press on Tuesday.
Given the surplus cash this state run lender holds, the impact reducing interest rate would be margin neutral.
"We would benefit by about Rs 250 crore per annum on account of cash reserve ratio (CRR) cut and Rs 50 crore per annum from the repo rate cut. As long as the benefit that we pass on is well within the Rs 300 crore, it would not have a detrimental impact on the margins," he elaborated.
SBI’s current loan growth stands at around 17 percent (Y-o-Y) and the bank is hopeful surpassing it by FY13 end.
Further, he added that the bank is much ahead of industry when it comes to realising assets. "In our case the NPL scene has largely played out in the first and second quarter and we generally recognise the problems early. The third quarter number seems to be much better than that," he added.
Below is the edited transcript of Pratip Chaudhuri’s interview with CNBC-TV18.
Q: What are banks likely to do, do you think that there is a base rate cut coming and do you think that it will be 25 bps or will it be more sectoral according to you?
A: Our asset liability committee will meet late today evening because we want to have all the data and based on that data we would take a decision. It could be base rate cut; it could be a cut in some spreads or maybe a combination of both.
Q: Extending that point forward because you already have surplus cash so you can cut deposit rates quite easily but will you give lesser cuts for your borrowers. What exactly will the impact be on the net margins of the bank itself?
A: It would be margin neutral because our back of the envelope calculation reveals that we benefit by about Rs 250 crore per annum on account of cash reserve ratio (CRR) cut and Rs 50 crore per annum on account of the repo rate cut. So, totally it adds up to Rs 300 crore. As long as the benefit that we pass on is well within the Rs 300 crore, it would not have a detrimental impact on the margins.
We still have some excess cash, but what we have seen in the last few weeks is a flight of deposits to the tax free bonds, liquid funds and income funds of mutual funds. So that has what has somewhat reduced our excess liquidity.
Yesterday, Reserve Bank of India (RBI) opened up the marginal standing facility (MSF) at 8.75, which is a huge positive. The Governor gave a clear assurance that there is no stigma attached to drawing under the MSF facility. So, therefore in terms of liquidity we seem to be quite comfortable.
Q: There is a lot which has been spoken about with regards to credit growth and it is not matching up with regards to what the RBI had put out in terms of an estimate for FY13. Can you throw some light with regards to your loan growth year to date and how much do you think that you are going to end the year in terms of loan growth totally for FY13?
A: Currently our year on year loan growth is running at about close to 17 percent. We have seen a huge surge in the month of December and particularly January. The interest gets applied on the last day of the month, so 31st being the last day; we expect a surge in the loan volumes.
Q: Can we assume that you will do 17 percent by FY13 or year end as well?
A: Looks quite likely. We could be surpassing that as well.
Q: One public sector undertaking (PSU) banker told me yesterday, he is seeing a new wave of non-performing loans (NPL) or restructuring in the midcap and the small and medium enterprises (SME) space. Is that true?
A: In our case the NPL scene has largely played out in the first and second quarter and we generally recognise the problems early. So, whatever we have seen in first and second quarter, the third quarter number seems to be much better than that. We are generally slightly ahead of the industry in identifying and declaring the problem. We have not seen any particular surge in the third quarter as such.
Q: In the last round of slowdown, from 1998 to 2003, the banks did not even have the law; there was no Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) to recover. Now you have a law to recover bad assets, still so much restructuring and so little recovery?
A: Look at it globally; the three major auto companies of the world, did the bank close in and sell off their assets. An orderly restructuring when you allow the companies to reorganise their liabilities is at the end of the day a much better deal for the banks and for loan lenders.
Even if you look at the Chapter XI bankruptcy code of US, which is largely followed in most other parts of the world, every opportunity is given to all the creditors be secured or unsecured to come together and look at a possibility of a restructuring or reorganising the liabilities.
If you close in and selloff the asset generally, the recovery thereof is much worse and even if you try for the change of management or selling of the company, we have realised much better value if it is a running company. Therefore, closing down the company, forcing into the auction is always the least preferred and is resorted to only when all other options have been exhausted.
Q: Yet private banks have shown far fewer NPLs and one senior PSU banker told me that’s probably because private banks are smarter in ensuring collateral when they give the loan and sterner in enforcing the collateral? Would you say that is true?
A: I cannot comment on the whole group of banks because for that you need an inside view, but if we look at our restructured book, it is closer to the private sector banks than to the public sector bank. You also have to remember that it also depends on what kind of clientele you have on books.
Generally, even among the private sector banks, which have more of corporate lending are more prone to restructuring than those which are confiding themselves to retail or lending against share or personal loan etc. So, corporate lending leads to restructuring because there are other interventions like the Board for Industrial and Financial Reconstruction (BIFR) etc. The one thing that has helped the private sector banks possibly is that they have a lower base rate. So, therefore they tend to attract the best of the credits.
We have also learned the game and we have kept our base rates low so that we get first preference among the best credits. What happens is that if you are not able to exhaust your loan portfolio lending to the best of the client then you will go for looking for second best, third best, fourth best and those are the ones which falter the earliest when the downturn comes.
Q: Do you think that your NPL cycle has peaked i.e. in Q4 and Q1 of FY13 you will possibly see progressively less NPLs?
A: Third quarter results are under audit so I myself will get a sense after a week or so but Q4 generally happens to the best because in Q4 there is a surge in revenues particularly, with the state government and that is the time they clear out all the contractor bails and all the payments for the public works done.
So, generally Q4 we have every to expect would be a good one. Q1 of next year would be a major play depending on how the Budget is, how the monsoon is and how the economy responds to the various stimulus measures that the government and RBI have taken.
Q: Yesterday, RBI partly touched on this, there is already one scheme for reducing gold imports that is gold exchange-traded funds (ETFs) will be allowed to deposit their gold with banks and you have gold deposit scheme. RBI referred to making banks both buyers and sellers of gold giving two-way quotes. Your participation is needed in both. How do you think these schemes will pan out?
A: I am not too hopeful of the gold ETF being dumped with us or being placed with us. The amount of gold we have got under the gold deposit scheme is around 2 tonne. We have not been able to profitably lend it out. Secondly, I do not understand the rational or logic of giving a tax rate of 10 percent on gold ETF.
If today on bank deposit interest, if the tax rate is 30 percent then what is the justification of having a tax rate of 10 percent on gold ETF. Having done that I do not think we should complain that people are putting money in gold ETF. If we want to promote a market, if we want people to bring back their gold to us there should be an opportunity to do so.
Today, if a customer buys gold from the bank, there is no way he or she can return the gold to the bank in case they do not feel like holding their savings in gold. Therefore, a two-way quote is very necessary and it is so there in shares, it is there in securities, it is there in foreign currency. So, the two-way quote, buy and sell option is very much necessary, no matter what is the commodity or product being traded.