SBI chairman Pratip Chaudhuri says that a CRR cut is more important because it augments the availability of funds in the economy.
Chaudhuri says that he wasn’t expecting to see a rate cut today because, as the Governor rightly pointed out, there are still signs of suppressed inflation. He further adds that the RBI cannot lead, but it has to follow inflation and base its actions on that. “I see some room for rate cuts, but only post another CRR cut,” he said.
Going into FY13, Chaudhuri believes that the worst is over in case of non-performing assets (NPAs) for the bank. “We are working with KFA to get some more liquidity, and even the coal and power issues are getting sorted, so FY 13 is looking better,” he elaborated. He also says that the capex situation is looking better for next year.
Below is an edited transcript o his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.
Q: Were you disappointed that there wasn’t a cut and what do you take away from the language of the Reserve Bank of India (RBI)?
A: I personally was not expecting a cut. When the bond yields are in the 8.3-8.4% range you cannot expect repo rate to be at 8% because there would be a clear arbitrage. But I think RBI has injected a significant amount of liquidity by reducing the CRR. In fact, what they have not done by cutting rates they have already done in the CRR. Most of the banks were expecting a CRR cut of 0.5% at the best, but the RBI has pleasantly surprised everybody by coming up with 0.75% reduction.
Q: The more important point is what the RBI is telling us about the policy just one month away. Are you getting any signs that they stand ready to cut or are they telling you that this is what we are going to monitor and you monitor the same?
A: To my mind RBI cannot lead it has to follow, so RBI has to very closely track the inflation number and position its interest stance on that basis. So possibly the inflation numbers have not given them that room. Second, as the Governor has rightly pointed out, there is still suppressed inflation in the fuel prices. So the inflation thing just cannot be wished away.
Q: The consensus expectations in the market was that the RBI will start cutting in April at least. With decent base effect and given the kind of growth rates, it makes for some monetary easing. But after what the RBI said today, the market is beginning to turn a bit skeptical on whether the rate cuts can come through. Do you think there is a risk that we may not see cuts in the near term?
A: To my mind, I think CRR cut is more important than a rate cut because CRR cut augments the flow of funds or the availability of funds in the economy. So long as the CRR cuts are adequate, I would not be too disappointed even if I don’t get a rate cut.
Q: The CRR cut obviously improves the banks liquidity with time because of the multiplier impact when do you think the cost of money for banks will come down? At the moment, CD rates were over 11% and have not really dipped much. When do you see your cost coming down and when do you see the cost to industry coming down?
A: I think there is a wide variation amongst banks. So for SBI, we were quite surprised because we are sitting with very comfortable liquidity. We are, in fact, lenders in the inter bank market but we still find there are banks out there who are borrowing CDs at the rate of 11.3% or even at 11%. This means that there is still some shortage of liquidity in the system and it might get a little more difficult by the time March 15, and the after math of advance tax is over.
Q: One obviously expects March to be an unusual month when people want to stay in cash and then so many CDs come up for rollover and advance taxes out of the system. But how are you looking at April? You already have the raw material of this CRR cut which will play out. Rs 80,000 crore have come into the system because of that, they will multiply. How do you see the cost of money for banks from April onwards? How do you see the yield curve going?
A: In India, for almost all banks 80% of the funding happens from deposits. I do not see much room for a deposit rate cut because the government saving schemes are today offering 8.4% and tax free bonds available at 8%. So if the deposit rates go below that, banks will lose deposits. But I would see some room for cutting the lending rates following the CRR cut.
Q: Do you expect to cut rates by the end of this month or even if the rate cuts don’t come, do you think it would come down marginally?
A: The asset liability committee will meet tomorrow and we will take a preliminary view there. But let us not forget by March 31, in the last week, the government pumps in a lot of money. Last minute funding for the projects, food and fertilizer subsidies, oil subsidies happen in the last week of the month. It will depend on the infusion of liquidity that happens in the last week of the March.
Q: According to you, there is a possibility of a lending rate cut. You expect that decision can happen only in April or could the ALCO come with something earlier?
A: It is not right for me to pre-decide on behalf of ALCO, but let me tell you when we had a 50 bps cut in the CRR last time, we passed it on with significant cuts in our educational loan portfolio. Similarly, we will definitely cut rates, but to which segment and to what extent, that would need a more granular analysis and that is what our ALCO does.
Q: Sectorally, when would you think lending rates can come down? Would it be rather in April because it is the traditional slack season for credit off take, and as you said, there will be a lot of government spending? The follow-on effects, multiplier effects of CRR will be seen. Would you see a general fall in lending rates in April in the system?
A: Quite likely. But it would depend on the government’s borrowing program. It will depend on the borrowing program because I think even the RBI will take a fuller view in April after the government’s Budget is passed. We will get an idea of the fiscal deficit number and also the scale and the schedule of the government’s borrowing program from the Budget.
Q: Now that the policy is over, we have to look forward to the big event tomorrow. What do you think the market will be comfortable with? We are getting some ranges of 5-5.3% fiscal deficit and the borrowing programme between 5.1 lakh crore and 5.3 lakh crore. Would that be your estimate, and if that is the number, do you think there is elbow room for rates to come down?
A: I would not comment on that because I am more comfortable in commenting on RBI and the bank liquidity. But the Budget encompasses a much larger canvas of the economy. It will not only be the fiscal deficit number, it would also depend on how the spending is been directed and what kind of allocation is being made for what kind of sectors.
Q: There is also a general feeling on the street that since about 70-80% of your lending is linked to the base rate, on a declining rate curve trajectory, the NIMs could begin to compare. The best of NIMs that SBI is enjoying right now at multiyear highs could be slightly behind. Do you share that view, and if yes, do you think the quantum could be marginal just about 10-15 basis points?
A: Base rate is a headline rate and the business of banking is about managing the deposit and the lending rate. Even if the base rate cut happens, the banks have to calibrate lending rates to individual borrowers and their deposit rates and other rates. Therefore, it is difficult to say that if the interest rate cycle reverses, the net interest margin would decline slightly. But currently, the NIMs are so good that I think we should be happy to live with a smaller NIM because even if the NIMs were to decline, the base widens, so we have a Net Interest Income (NII).
SBI stock price
On November 30, 2015, at 11:55 hrs State Bank of India was quoting at Rs 251.15, up Rs 1.60, or 0.64 percent. The 52-week high of the share was Rs 335.90 and the 52-week low was Rs 220.60.
The company's trailing 12-month (TTM) EPS was at Rs 18.32 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 13.71. The latest book value of the company is Rs 165.49 per share. At current value, the price-to-book value of the company is 1.52.
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