May have different base rates for different tenors: SBI

With the Reserve Bank of India (RBI) announcing a new methodology to calculate bank base rates using marginal cost of funds, State Bank of India, the country's largest state-run lender, may move to a structure in which it could have different base rates for different tenors, chairperson Arundhati Bhattacharya told CNBC-TV18.The base rate is the lowest rate at which a bank can lend and banks currently use a number of methods to calculate their rates, such as average or blended cost of funds. But the Reserve Bank proposes to roll out the new costing method from April 1 next year amid complaints that there has been slow transmission of monetary policy -- that is, there is a considerable lag between the RBI cutting its repo rate and banks following up with cuts in their lending rates."These guidelines will benefit new customers. Existing customers will also have an option to shift to the new regime with some conditions," the SBI chief said. "Sufficient time has been given to banks to switch over to the new regime."Older customers will have a reset date of a one-year interval that will allow them to move to the latest interest rate, Bhattacharya added.In the interview, she also discussed a number of other issues that have plagued banks of late, such as the non-performing asset (NPA) crisis.Below is the transcript of Arundhati Bhattacharya’s interview with Reema Tendulkar and Latha Venkatesh on CNBC-TV18.Latha: Tell us how exactly the new base rate formula will work. Will you be announcing several rates? A short-term rate, a medium-term rate, a long-term rate – just tell us how it works.A: To tell you the truth, I do not yet know. As you know, the circulars come very late in the evening. I have had meeting since then, so I have just had a cursory glance at it. But, I think it will make sense to have different rates, just as you have a three month London InterBank Offered Rate (LIBOR) and a six month London InterBank Offered Rate (LIBOR), because that really works in the cost of funds for different tenures. As you know, even today, your deposit costs are different for different tenures. And that should get reflected into the pricing on the borrowers’ side also. So, probably we will have several rates. How many, very difficult for me to tell you right now, but whether they will be matching with the buckets of my deposits, I have got to see whether that makes sense, but yes, it will be more than one.Reema: How will the monetary transmission be affected? Will you be able to pass on the lower rates to the newer borrowers or will you be able to pass it on to short-term borrowers first?A: It will always be the newest borrower that will be impacted first, because the new borrower will get the rate that is prevailing on that particular day, whereas the older borrower will get impacted only when his reset debt date comes up. And that reset date, if he has just had a reset the day before our rates have been set, in that case, it will take one year for him. If it has been reset six months before my date is reset, then it will be six months for him. So, everybody will have a yearly reset date. And the older borrowers will get impacted only on that particular reset date.Latha: What do you expect? You will have three month rate, a six month rate or will you have even more tenures? Will you have even one year tenures, three year tenures?A: Already, RBI has said that they are expecting to see rates up to one year. I think that is the way it will actually be because basically, if you are going to reset every loan at one year intervals, then basically, a one year rate makes sense, unless you are giving a loan that is not going to be reset for three years, which can happen. For construction loans, term loans, project loans, it is important to keep rates at a particular level. So, if the market can graduate to that kind of a rate regime, it will be good. And we will see how it works. Again, as I said, I really have not gone through it very well and we really have to sit down and look at it properly and see how the numbers are working out before we take a call.Reema: What about the margins? The way we see it is that your margins will be less affected or less impacted now. Could you comment on the net interest margins (NIM) impact on SBI?A: To some extent yes, because as you can see, you are taking the marginal costing going forward. Instead, earlier what we used to do, we used to take the average cost of funds, so we used to take the cost that is already on our books, and then work out what would be the marginal costing or rather what would be the base rate costing. Here what we are going to do is we are going to take the rates as they will impact going forward. And therefore, to some extent, what you were saying is correct, that there will be less impact on both sides. When it is rising and when it is going down and also, because the resets are going to happen only at yearly cycle, therefore, obviously, the transmission either way will be slower.Latha: Now that we have you with us, can you tell us about these ongoing negotiations between RBI and the Banks on more non-performing assets (NPA) recognitions? Is there this list of 150 loans which RBI wants to be recognised as bad loans?A: Basically, every time whenever there is an Annual Financial Inspection (AFI), RBI comes with a list of names where they believe there is a divergence from their thinking and from the way the bank has treated it. Thereafter, there are several rounds of discussions with the banks regarding these divergences and either RBI says okay, they accept the banks views or they say no, we still believe that you should go ahead and classify it. And this list of divergence has been happening for the last 3-4 years and every time we take some additional provisions depending upon what RBI feels the asset classification should be. So, this time also, something similar has happened.The only difference this time has been that RBI has broken the AFI into two parts and in respect of the asset quality bits, they have done all the banks together instead of doing it piecemeal. And the rest of the thing, they are doing it piecemeal as earlier, the rest of the compliances, etc. now, having done everything together, they are trying to take a view across industries. So, that is the only difference this time.Latha: I wanted to ask you about the strategic debt restructuring (SDR) loans. What we picked up from RBI is that they want you to keep some precautionary provision even for SDR cases and not wait for 18 months. Is that something you share?A: It is not that, but we do have a little bit of a difference over here with RBI because we believe that if there are some technical difficulties and therefore the promoter has not been able to do something particular, as long as it is not impacting on the viability of the account, no purpose is served by recognising it.So, we are more inclined to say that where yes, viability is not coming up or say, the equity portion that he was supposed to bring in has not been brought in and therefore, the viability is not getting established, we fully understand that those need to be recognised and in fact, we have been recognised and in fact, we have been recongising it all the time. In fact, in respect of corporate debt restructuring (CDR) cases, many a times, analysts tell us that you give us the numbers where the moratorium is going to end, and we keep telling them that there is no shelf like a moratorium and you fall off the shelf. So, if the promoters are supposed to bring in equity in 120 days and they do not bring it, then automatically, at that point of time itself, it is recognised as a failed CDR. So, there is no question of waiting for two years for the moratorium to end and at that point of time you recognise it. That is not it at all. But, on the other side, if he is being asked to pledge his shares within 120 days, and there are genuine difficulties because of which he is not able to pledge it, I do not think any purpose is served by pulling the plug.Latha: let me put it this way. How large is the unrecognised bad loan problem? Credit Suisse has put out a report that it is actually 16 percent – 5 percent gross NPA, plus about 6 percent of restructured assets and a further 6 percent which has gone under SDR and 5:25 and such like. So, actually 16 percent of the total book is actually stressed. Will you agree with that number? Now, that looks really large.A: I do not really think so. Frankly, I do not have these numbers industry-wide, not possible for me to have also. But, we do know for instance one particular group, I do know that they have taken the debt but not the earnings before interest, taxes, depreciation and amortisation (EBITDA) arising out of that debt.So, in fact, they came to us, we questioned them and they immediately came and showed the figures, so they had bought over certain things, so the debt taken over, that was shown, whereas the EBITDA of those particular units that they had bought, that was not included. So, I do not think you need to rely totally. However, there cannot be any smoke without fire. So, obviously, they have some numbers and those numbers even if you discount it, some numbers may be correct. But, as I said, again, this is where we need to ensure that the economy grows strongly enough for many of these to recover. Also, it needs new people coming in. We need to ensure that there are restructurings in certain places and restructuring may be in many ways, not only through the CDR route, but through sale to other people by ensuring that there is conversion of certain unsustainable debt to equity and things like that. So, those are the sort of things that will have to get done. So, I am not saying that the exercise is over by any means. But, yes, we are also at one with the regulator that we need to get this over as quickly as possible.Latha: But the regulator is talking about cleaning or at least providing for everything by April, 2017. Now, if this much of loans are or a substantial amount of bad loans is not yet recognised, just tell me how much can the load of provisions go up by? At the moment, it is about Rs 80,000 crore or something that come in. How much can the load of provisions go up by if you recognised all the bad loans?A: It is very difficult for me to say. And again, as I said, in this cycle one good thing about NPAs is that there is a lot of asset on the ground. So, I do not think you should write all of it off. There is a lot of good assets over there and they have value and with the economy beginning to grow again, many of them will regain much of the value. Because the replacement cost of these assets is huge at today’s prices. So, I do not think you should write off the whole lot and we should take it in a reasonable and in a more practical manner. So, again, numbers I really do not have, so I cannot give you.