Unable to pass rate cut benefits to old borrowers: SBI

On Wednesday, State Bank of India had cut home and auto loan rates to the lowest in the market. Speaking to CNBC-TV18, Diwakar Gupta, MD & CFO, SBI said the rate cut will stimulate demand for homes and autos but won't impact the company's margins in a big way.

He, however, said a base rate cut at this point is not possible, but if liquidity situation improves with the release of SLR securities, then a case of deposit rate cut can me made.

"(There are ) liabilities also, if I cut deposit rates, I don't cut them on deposits that I have already taken. So though it looks a little unfair. I think it is unfair to expect that," he said.

Below is an edited trancript of the interview. Also watch the accompanying video.

Q: This will be a pressure on your margins; it isn't as if the cost of money has come down?

A: We have been trying to see how we can reduce rates in general. The expectation is that eventually the rates will reduce but even if for sometime they don’t it is only going to affect marginal incremental business. So it is not really going to be a major effect on our Net Interest Margins (NIMs) given the fact that auto and home is about 18% of our portfolio and a 20% growth in that portfolio over a year will give us a smaller NIM on that fraction of the total advances.

Q: To take that point forward, how much of an incremental demand would you possibly see at this point then?

A: It is very hard to say but the fact of the matter is that high rates of interest are keeping prospective home loan buyers and some prospective vehicle owners from taking loans. So this should certainly be a stimulus and this also in sectors where we are seeing reasonable good credit behaviour. So it should be good for the bank despite the fact spread is a little lower.

Q: Chairman Pratip Chaudhuri was pretty emphatic because term loans are not in much demand and working capital needs are being met by CPs. Next area of focus, he said, will be retail. He was very clear about that while addressing the press after RBI's policy announcement. So how far will SBI be willing to go to get more retail borrowers because you do not see much growth in other areas?

A: No we are already at 10.25% on the home loan that is just 25 basis points over the base rate. I don't think there is much room for cutting further. But yes, I mean this cut could ultimately lead to a circle of deposits getting cheaper and therefore some more cuts being passed, and a softer interest rate regime getting kicked in.

Q: So you see a base rate cut possible?

A: Well. not at the moment, but if liquidity is ample and with the 1% release of SLR securities, that should get easy and therefore there could be a case for some backstage experiment with reducing the deposit rates.

Q: At this point is the Statutory Liquidity Ratio (SLR) cut of 1% completely factored in, in terms of additional liquidity that the bank probably has?

A: No. as I had made that comment on the policy day itself, SBI has not been facing a liquidity pressure over the last 5-6 months; we are in fact quite comfortable. So the additional SLR cushion is really a buffer, it’s a comfort. It doesn't add to the bottom line immediately.

Q: What is your current SLR?

A: We are normally at 3% over and above the regulation. So that would become 4% now.

Q: There will be definitely complaints from existing borrowers who will say they haven't got the advantage but new borrowers are getting the advantage- at some point will you see yourself extending it to the existing borrowers?

A: That is not the market practice, that is fact of life. Today, if Maruti were to cut rates on their cars by Rs 10,000, the car that was sold yesterday won't go cheaper by that amount. (There are ) liabilities also, if I cut deposit rates, I don't cut them on deposits that I have already taken. So though it looks a little unfair, I think it is unfair to expect that.

Q: The Maruti example doesn't wash at all; when I buy a Maruti car, I buy a Maruti car. When I buy a floating loan, the bank gives me an undertaking that they will pass on the cuts if it comes, they pass on the hikes don't they? So I don't think the analogy quite fits. But that is another matter. I just want to know anywhere on the anvil, in the near-term you see this getting extended to existing borrowers?

A: I don't think so because that sets a bad precedent. The promise is of float versus the base rate and that promise holds. When the base rate is cut, existing borrowers will feel the relief. Now there is nothing to say that I cannot give a further relief to somebody else. It is like my being in a position where I need to push business, I can give incentives, and you cannot have them extended across portfolios.

Q: The RBI has frowned on this in the past!

A: Well, we will cross the bridge when we will come to that.