May drop lending rates further if RBI cuts 50bps: SBI

Just two days ahead of the Reserve Bank of India's (RBI) all important monetary policy review on June 18, State Bank of India (SBI) today announced cut in lending rates between 0.5-3.5%, mainly for the small and medium enterprises (SME) and the agriculture sector. However, the banking leader clarified that interest rate on home and retail loans will remain unchanged.

Pratip Chaudhuri, Chairman, State Bank of India said that the latest round of cuts are different from the cuts undertaken in May. If the RBI announces a 50 bps rate cut, then the bank is willing to drop lending rates first, informed Chaudhuri. He further added that lending rates are conditional on CRR cut and therefore, he is not committing a base rate cut at this point. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: In the State Bank press conference today some of those lending rate cuts were announced. Are these different from the ones you did in May, have some additional rates been dropped?
A: Yes, these are different. In May we had dropped the car loan rates and rates for education loans. But, we had said at that time that since the CRR cut has been very significant, 1.25%, we need to have slightly deeper cuts. We are really trying to be selective and after the liquidity situation settled down from June 1, we have brought in extensive cuts in interest rates, particularly for the SMEs and the commercial sector. Q: So most of these lending rate reductions are for the SME sector and the mid corporate sector?
A: And even larger. Also read: SBI takes credit guarantee cover for MSE loans below Rs 1cr Q: When would you think of extending it to the base rate and to the retail sector?
A: At present we don't think we need to extend it to the base rate. We are re-balancing our portfolio. Our portfolio got skewed in favour of home loans and we lost out a lot of SME business. So we are trying to retrieve the lost space. Q: What about your expectations going into the credit policy? Given the monetary policy objectives, growth has not done very well at all and inflation has not quite gone down. We still have a March inflation that has been yanked up. What are your expectations at this juncture?
A: It is not expectation, we have made a request to RBI that this is the time when we need to get the rate of interest down. I do not say that getting the rate of interest down will solve all problems, in my view this is a necessary but, a sufficient condition.
Let us start making the necessary ground condition. If there is a 1% CRR cut, I think more than the actual cut which ofcourse would happen in time, it will give a boost to the whole investment mood, the lenders mood and the mood in the economy.
_PAGEBREAK_ Q: If such a rate cut were to come, let us assume 50 basis comes initially will you be dropping your deposit rates first or will both deposit and lending come together? What might be your reaction assuming a 50 basis CRR cut?
A: If that happens, we will drop the lending rates first and then deposit rates have to be calibrated depending on what other forms of savings are offering. If there is a room for further deposit rate cut then we will drop the lending rates even further. So lending rate would be a two step process but the first step is definite, the second step would be conditional upon the extent of deposit rate cut. Q: Given that small savings and EPFO are paying over 8% and consumer price inflation is running well over 10%, would there not be a pressure on deposit collection as you are correctly hinting? Is there really any elbow room to cut deposit rates at this juncture?
A: That will depend on the competitive scenario because currently, the government is borrowing in the T-Bill market at 8.3%. If that rate were to come down then it would give us more room for lowering the deposit rate. Q: Government is also borrowing a great deal. Even assuming you get a 25 bps repo cut and a 50 bps CRR cut, which is there in our poll with bankers, that is the other end of the spectrum. It's a minority which expects that. If that were indeed to come, do you really see CD rates falling much or CP rates or even T-Bills and bonds falling much given the size of the government borrowing?
A: That will depend on the mood, but overall the trend would be downwards. Q: Since you are saying that the sequence would be lending rates falling first, would you expect more pressure on your margins?
A: Not exactly because lending rate should be conditional upon CRR cut. As I have time and again said, repo rate cut is not very material in terms of amount and numbers. If there is a CRR cut, we will drop the lending rate cuts and that would have a neutral effect, it would neutrally impact the net interest margins. Q: Would it be right to say that if you got this combination of a 50 basis CRR and maybe a 25 basis repo, you could even contemplate dropping base rate?
A: I am not committing base rate but overall interest rates should move down significantly. At the end of the day, customer wants the rate to be lower. That would happen but I am not putting much value on the repo rate cut in terms of amount and numbers. It would not be significant but, if there is a CRR cut depending on the degree and magnitude, certainly the lending rate should drop even if the deposit rate stays where it is. Q: Under the circumstances, what kind of a loan growth are you expecting for the industry and for yourself given the sentiment as well as the kind of GDP numbers we had and the credit off take that you may have already observed in the last six months?
A: I find it rather strange. I think India is the only country where people do a loan growth projection and a deposit projection, which is not a very common industry phenomena. But, currently we are maintaining a projection of 16-19% loan growth and similar amount in deposit growth. Q: What is the common industry standard globally and how would you compare India on that parameter?
A: Globally loan, bonds everything is seen together. So, if at all you have to see, you have to see the increase in the balance sheet size. But you don't see loan separately as if loan is all that matters and investments do not matter. I think there is a great obsession with loans which perhaps may not be very useful. Q: Would you say that a CRR cut and a resultant cut in lending rates might materially improve the NPL position in both the industry and in your bank?
A: Not particularly. But if it generates a buoyant environment and when people are bullish about growth, it brings in investment. It steps up the mood and a whole lot of good things happen because a lot of impact is also psychological and depends on the whole mood.
If there is a rate cut, then generally it is thought that growth picture looks brighter. When the growth picture looks brighter, depending on the extent to which it looks, FDI, FII investment flows and every other thing improves.