Despite SLR cut, SBI sees little room for deposit rate cuts

State Bank of India (SBI), the country's largest public sector bank with a market capitalization of Rs 1.3 lakh crore (as of Tuesday's close), is not disappointed with the Reserve Bank of India (RBI) policy announcements.

The RBI kept rates unchanged in its first quarter monetary policy review yesterday but slashed SLR by 1% to 23%. Speaking to the press, shortly after the policy announcement, SBI chairman Pratip Chaudhuri said the benefit of SLR cut can be passed on to the retail sector as large long term loan proposals are very few across banks and working capital demand from corporate houses is low.

However, speaking to CNBC TV18, Chaudhuri made it clear that despite the SLR cut, there is very little scope of reducing deposit rates.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Is there any room for deposit rate easing as you can see in the next few weeks and months given that there is a fairly large calendar of tax free products from government backed institutions which are coming up over the course of the year and given other competing products, do you see any elbow room at all?

A: It is not coming from that, our Asset - Liability Committee, ALCO is meeting today afternoon. Although ALCO will take the final call, according to me, there is less room for a cut in deposit rates because the small savings rate is 8.6%. If you top up this 8.6% with subvention, a person gets 8.75%. Therefore, the room for deposit rate cut is slightly less but, perhaps there could be some cut at the long ends.

In fact at the long ends, five years and above, we had reduced our rates from 9% to 8.75%, and then we found that the other banks are stubbornly at 9-9.25%. So we had to move back our deposit rates.

Q: Even then would it work because these tax-free bonds which are coming in from government institutions and this year I believe the calendar is Rs 60,000 crore, they are nearly 8% post tax, why would anybody want to look at public sector deposit at much less attractive rates even for a longer tenure and these are 10-15 year products?

A: It is true but, these were 8% last time. This time we will make a request to the government to not keep the coupon so high. Since they enjoy the tax advantage, our recommended coupon to them should be 6%.

Secondly, bank deposits have other attractions. They are liquid and you can take a loan against the bank deposit. If it is in a neighbourhood bank, you can break them anytime you want. You can use them as collateral for so many things. So bank deposits will continue to have an attraction and Rs 60,000 crore should not really bother us because the total bank deposit growth in a particular year is something like Rs 7-8 lakh crore.

But what is draining away deposits from the banks is not only tax rebounds which are yet to hit the market at the fixed maturity plans of the mutual funds. But you are very right in highlighting this point from a tax perspective. The bank deposits are at the greatest disadvantage or handicap.

There is a case for making it a level playing field in terms of interest income, whether it is by way of deposits, whether it is by way of fixed maturity plans or tax-free bonds. It will be a level playing field and that is how it is the world over because we believe the people who are investing in fixed income products are not really the risk takers.

I do not complaint against tax breaks given to equity investors. But, those who are investing in debt should all be at par and let all the debt issuers compete on price or on service or on convenience, not on unfair tax advantage.

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Q: The Reserve Bank of India (RBI) sounded a little unhappy about lending rates yesterday, and that there has not been incomplete pass through. I know public sector banks have said that you should not look at only the last two rate actions from RBI but, the history of that. All said, do you think there is any room for you to cut lending rates even on any specific products?

A: Yes there is and that is why we called the meeting of ALCO today. If for example, for Rs 10 lakh crore of demand and time liabilities if I have to keep Rs 10,000 crore of less SLR, the average earnings to SBI is 7.5-7.8%. If I can recycle this money into a loan even at 10.25 or 10.5%, to that extent I gain. I would do everything possible and for that matter, every bank would do everything possible to enhance their loan portfolio.

Q: So which products, I know ALCO will take the final decision but, are we talking about retail housing or what kind of products do you think are most likely?

A: It is more in consumer loans, consumer meaning home and car particularly because the term lending business has its own dynamics. Somehow we are not seeing significant momentum in the industrial term lending. Therefore, we think that greater productivity or greater results would come from lending to the retail because the Indian consumption story is still pretty strong.

Q: Even if you were to do some softening in consumer loans, do you think the maximum ability given the quantum you are talking about would be 25 basis points no more?

A: That will depend from business to business, it will be something for car, something for home. Even in home, there are different segments. There is the priority sector below Rs 25 lakh, upto Rs 1 crore, above Rs 1 crore and therefore, the cuts or the rationalisation may not be uniform across all segments. In fact, our endeavour would be to reduce the rates more in segments where we think the demand would respond more to the rate cuts. It will depend on elasticity of that loan demand.

Q: From what the Reserve Bank said yesterday, it did not appear that it was in a great rush to cut rates over the next few meetings, either CRR or repo. Given where inflation is, if that is really the case, do you think a bank like yours would be able to cut rates at all to the manufacturing or the SME sector during the course of this year at all?

A: We thank the Reserve Bank for having expanded the scope of thinking beyond repo rate and beyond CRR. In the last policy they brought in additional refinance for export credit which benefitted us to the extent of Rs 8,000 crore. And benefit means additional liquidity available at 8% and this time again we have another Rs 10,000 crore.

 Let us first deploy this Rs 18,000 crore and then see. But yes, CRR cut would have been more effective. However, given the overall perspective and the need to keep inflation expectations down, RBI has done it. We have to live within the framework and keep requesting RBI for more rationalization in the interest rate particularly, CRR which I think is an unfair tax on the banks.

But, given the overall situation, RBI has to keep a view. RBI has never said that there is more room for rate cuts in banks because RBI recognizes that the banking system is very well distributed. There are a number of players so there is no possibility of any cartelization in keeping the rates up. Sheer competition among the number of players is bound to push down prices where there is an equilibrium between demand and supply.

Coming to your point of demand for credit from industry- any company which has a rating of single A and above is not likely to resort to working capital financing because the base rate is at 10-10.5%. Some banks have a base rate of 9.75% but they are taking recourse to the commercial paper market where the funding is available at 9.4%-9.5%. That market is pretty much open for the corporate.

Regarding term loan, they would borrow only when there is demand or there is planning for fixed assets. So no sector is starved of credit. But, possibly we think by lowering the price of credit, it should be possible to stimulate demand in some sectors. We think retail would be one of them. So ALCO will take a detailed view on which sector, in which segment, in which category we have what kind of price cuts.

Q: You have not reported results yet for the quarter but we saw a trend this time around in large public sector banks and that is the NPL issues seems to be growing – is that a feature which is consistent with your bank as well that you are experiencing more asset quality stress?

A: Not particularly. Again, I am in the silent period so it is not right for me to comment on which companies are going into CDR, which companies are asking for rescheduling of loans. Asset quality stress is too well known. But one thing that possibly has not been highlighted or has not been noticed is that bank after bank has improved their net interest margins. So long as the net interest margins are adequate to take care of the possible credit losses, we do not think the situation would be too alarming.

But please remember if a company goes into reschedulement mode or is not able to service its obligations, the livelihood and the loans given to its employees, to its suppliers would have a cascading effect.