India’s fourth-quarter and full fiscal year 2012-13 gross domestic product (GDP) growth figures are expected tomorrow (Friday, May 31) and most economists are predicting that the economy would have growth sub 5 percent, worse than the government's estimate of a lowest-in-decade 5 percent growth.
But Pratip Chaudhuri, Chairman, State Bank of India (SBI), in an interview to CNBC-TV18 said FY13 GDP growth would come in above 5 percent. "For banks index of industrial production (IIP) numbers are more important than gross domestic product (GDP) number but I expect the overall GDP growth number to be upwards of 5 percent."
The bank reported nearly 19 percent year-on-year drop in its fourth quarter (January - March, FY13) net profit at Rs 3,300 crore. Higher provisions against non-performing assets (NPAs) and marginal growth in other income dented the bank's profit margin.
Chaudhuri said they expect to see improvement in asset quality going forward and have seen an improvement in asset quality ratio in Q4.
He also cleared the air over recent insinuations of SBI's involvement in Know Your customer (KYC) norms violations saying his bank was not named in the RBI report. Chaudhuri is also hopeful of a CRR cut in June.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: First I am going to talk about the big data that is lined up tomorrow, the Q4 gross domestic product (GDP) data. Most economists are expecting a sub 5 percent number to come in this time around. What is your estimate of where growth is headed and what we could see in terms of FY13 as well as the Q4 number?
A: I would not be too much focused on the overall growth number. But for the business of the bank it is the index of industrial production (IIP) number which is more important. The index of industrial production because that is where most of our exposures are concentrated, but overall growth number should be upwards of 5 percent.
Q: According to the recent deposit growth data, the growth is muted at 13.4 percent. We have seen the lending deposit (LD) ratio really peak out- going forward is there any scope right now for bankers to cut deposit rates because quite clearly the transmission of rates is not taking place unless deposit rates come down? What is your call on that?
A: These are all bank specific issues. It is difficult to generalise on the whole bank level. As far as deposit rates are concerned, even today there are banks advertising at 9.1 percent and 9.6 percent. But I think deposit rates have a natural floor at the Post Office deposit rates. Since post office deposit rates are at 8.5 percent, banks would find it extremely difficult to take their own deposit rates below 8.5 percent and at that point the deposit may start leaving the bank.
We moved our deposit rate to 8.5 percent; we probably learnt our lessons and came back to 8.75 percent and that is where the deposit rate resides.
Even though the 10-year bond and the Treasury bill rates have dropped, but since the post office rates which are more important for the retail investors have not dropped, that is why there is some rigidity about the deposit rates.
Q: This time around we have noticed a trend where a lot of banks like yourself have seen a slow down in the top-line. SBI saw its net interest income (NII) de-grow by about 5 percent this time – are you noticing a trend where there could be an aggression in terms of growing our loan book at the cost of margins perhaps – is this some kind of pressure that you are noticing in the quarters to come as well?
A: Yes, because loan growth or for that matter any volume is a function of price. So, if somebody wants to grow the volumes, they have to be more relaxed on the price. Speaking for us, the Q4 numbers have to be seen in a different context. Our net interest income (NII) was lower compared to the corresponding quarter because the pension fund money moved out to a separate fund. Otherwise, the pension fund was coming as an interest free amount to the bank.
We are still confident of maintaining a net interest margin on domestic business between 3.6-3.7 percent. But as we become more relaxed and start rolling out interest concession in loans, if think at the same time we would expect an improvement in the asset quality.
Q: There is a brokerage report, which says that in FY14 because of the kind of aggression that you may have to undertake your net interest margin could actually slip below three percent. You are saying that’s not the case and you are still targeting as you just mentioned over 3.5 percent? Could you clarify?
A: Yes, in fact I am more aggressive at 3.6 percent. The initial numbers of the month of April also indicates that the net interest margin is holding pretty firm at 3.6-3.65 range.
Q: Just coming to that point you made about asset quality. You are seeing a substantial deterioration in terms of your restructured loans. In general, you have about 25 percent of loan restructured are turning bad versus an average of around 10 percent earlier on. Do you see this as an increasing problem for bank such as your own and what could the pipeline of restructuring look like as we head into the new fiscal?
A: The total amount of nonperforming asset (NPA) as a percentage of restructured book has increased from 15 to 25; it was not 10, it was about 15. However, part of that is also because some of loans which were in the restructured category got rehabilitated and moved into the standard category. So, this is also to some extent the denominator effect.
The restructured loans from hereon would find it increasingly difficult to move back to the standard category unless the restructuring is done very carefully, and recognising the realities on the ground.
Q: How many more quarters of stress loan do you think banks such as yourself will have to see. SBI is still sitting with a high gross non performing assets (NPA) of almost 5 percent which is quite worrying – how many for quarters of pain are you envisaging?
A: To put things in perspective - the gross NPA has come down from 5 percent to about 4.75 percent and also the net NPA is down from 2.53 to 2.1 in our case. Some of the problems have already been accounted for by making provision. However, the asset quality would largely be a function of the growth factor in the economy.
So, if the growth factor improves, if the investment climate improves, if the receivable position improves and particularly, the fiscal positions of the state governments and the payment experience of the contractors who are working for state government or the construction companies who are working for state government and infrastructure projects their dues get realised in good time then only the asset quality would show marked improvement. Otherwise, the worst is over but some amount of weakness would continue.
In this one thing is very important that our large corporate book has held very well. The total delinquency there is 0.5 percent even though the book grew about 40 percent. We would now be moving more to investment grade assets and we will be little indifferent to the weaker quality assets.
Q: Just to come back to that NII because your stock is down 13 percent since earnings that has been a bit of a derating. Since you said it was a bit of a one-off in Q4. In FY14, what kind of NII growth numbers do you think SBI will be able to report?
A: NII would be a function of the top-line growth. We are targeting top-line between 20-25 percent. So, we expect the NII to be in that range.
Currently, we have shed all high-cost deposits. We don’t have a single penny of certificate of deposit outstanding, we have opened 700 branches and we have recruited young people, which is giving a tremendous boost to our deposit gathering activity. Our retail deposits are holding at something like 2.5 percent per month, which could be about 30 percent per year.
Q: Coming to the employee cost, in that case you made provisions for wage hike in FY13, but not for pension. In FY14, how much impact do you see because of that and in terms of bottom-line how much will that be impacted?
A: We have made a provision of 15 percent in pension as well. However, the new staff who are joining are not under the defined benefit scheme, they are under the defined contribution scheme, so as their number goes up the pressure on the pension fund would abate. Currently, the pension fund yields are so good that they are also contributing to a good yield on the pension fund book and the bank from its profit and loss is required to make lesser contribution.
There are also several other positive coming in. We are sitting on a sizeable gain on the bond portfolio which we could use to clean up our balance sheet.
Q: I am sure you would have seen the Reserve Bank of India (RBI) report, which we also broke on the channel yesterday. They find that almost across all the banking companies there is quite a serious problem in terms of know your customer (KYC) norms and some other norms being followed, your reaction to that report?
A: Yes, but I think it is bank specific. I am happy that in not a single report, SBI has been named. We would like to maintain the highest standards with KYC norms and money laundering and all the compliance issues and I have time and again said that we have zero tolerance for such activities.
Q: After the last RBI policy there was clearly no scope to cut lending rates and transmit it to the system – what is your expectation from the June policy. What do you think the Reserve Bank should or could do and how would that really get translated into the system in your mind?
A: Reserve Bank, given the current inflation data could very clearly reduce the cash reserve ratio by 50 basis points. If that happens, the money trade transmission would get accelerated.
Q: You were speaking about sizeable gains in your bond portfolio. What could the treasury gains look like in the next quarter or an average run rate?
A: Currently, as we close the book around May 31, it should be about Rs 3,000-4,000 crore or more, on the bond portfolio itself.