SBI eyes CRR cut along with repo to pass on benefits

Ahead of the Reserve Bank of India's monetary policy review on March 19, Diwakar Gupta, MD & CFO of State Bank of India wants a repo as well as a cash reserve ratio (CRR) cut. He further added that the market is expecting the central bank to ease repo rates by 25 basis points. It will help improve sentiment more than cost reduction, he noted. According to him, CRR cut will lead to immediate pass through in lending rates.

"Consensus is building around the fact that most likely we will have a 25 bps cut on the repo rate. We would love to see some CRR cut as well because that is what gets transmitted immediately in terms of rates. A repo rate cut only is a signal and banks have to wait for it to translate into a P&L effect before they can transmit the effect of that," explained Gupta. Also read: RBI can change mkt mood; buy Titan, Jubilant: Dron Capital
Gupta also said that KYC issues still persist with some private sector lenders and he does not expect the RBI to address recent allegations about banking frauds tomorrow, during the policy meet.  However, the central bank may take administrative measures to address KYC concerns and to curb any untoward incident. He also mentioned that KYC guidelines at the moment are quite stringent and operational failure is leading to problems associated with it.
Besides weak growth is reflecting in the bank's credit demand as well as asset quality, informed Gupta. As far as the seizure of Kingfisher Airlines' assets are concerned, he told CNBC-TV18 that bankers are proceeding with it.
 
Here is the edited transcript of the interview on CNBC-TV18. Q: A word on what the State Bank of India (SBI) expects to see from the Reserve Bank of India (RBI) in terms of whether policy cuts will come through?
A: We have a wish list and that wish list is both repo and Cash Reserve Ratio (CRR) cut. Consensus is building around the fact that most likely we will have a 25 bps cut on the repo rate. We would love to see some CRR cut as well because that is what gets transmitted immediately in terms of rates. A repo rate cut only is a signal and banks have to wait for it to translate into a P&L effect before they can transmit the effect of that. Q: What would transmission be like? Post-January when you got both a repo and a CRR while rates did come off in specific segments like cars and consumers, overall the Benchmark Prime Lending Rate (BPLR) came off only 5 bps or so. Would SBI be looking at transmitting any cut only selectively across segments or across the board?
A: SBI has already done very significant cuts in specific segments. My sense is that we would really be looking to cut the base rate itself by way of transmission, but how the calculation works is that last time around 25 bps CRR cut released about Rs 2,800 crore for us and that is an earnings opportunity of about Rs 300 crore.
A 5 bps base rate cut is exactly that amount of interest foregone. So the transmission was complete, but since we are not comparing apples with apples a 25 bps cut on repo does not translate into a 25 bps cut in the base rate. Q: You have been in the sector for so many decades. Were you alarmed at the revelations which came through last week on some private sector banks or would you say that these things are known to bankers like you and you know that some of these things happen without the regulator being in the know?
A: It would be unfair to say that these things happen routinely. We still do not know the extent of the problem. Let me just say that as public sector bankers, we do find that there is a certain problem with Know Your Customer (KYC), with at least some of the players in the private sector space.
We have several frauds of conversion where people takeaway a draft from us and put it away into an account. Anecdotally, we find that most of these accounts come from the private sector space. So I guess their model makes them more vulnerable to compromise at the front line.
_PAGEBREAK_ Q: The Finance Ministry and its officials are apparently meeting and they will be talking about this issue. But separately, do you expect it to be addressed by the RBI in tomorrow’s policy meet in terms of making the system more stringent for banks and putting out loans or putting out any of these investment options?
A: It is a very serious matter and I am sure the regulator would be equally willing to take steps for finding a remedy to the situation. Whether it needs to be announced in a policy meeting is something which is debatable. These are administrative measures and I think they can be rolled out irrespective of any date for policy review. Q: You also have a good finger on the pulse of what is happening with the economy at large. Aside from what may come through in terms of a 25 bps cut, would you concede that the bigger challenge this year seems to be maintaining some kind of net interest income growth or the kind of loan growth that you target rather than what is happening at the margin level?
A: For the economy, growth is really centrestage right now. If you look at the growth phase of 2005-2008 or even that decade where inflation remained at close to 5 percent and growth was at 9 percent, it was because investment-to-GDP was at a high of 38 percent. That has come off a lot and the growth that we are seeing today would be to some extent very directly related. It needs to be pushed up.
As far as the economy is concerned, if there is one factor we would worry about, it is growth. It is showing in the numbers. It is showing in the asset quality. For the bank, credit growth has been good even this year. We are clocking a Y-o-Y of close to 19 percent right now and we could end the year anywhere between 17-20 percent depending on how the last fortnight pans out and that is of course higher than the industry average.
For us, even deposits have been good. But yes, margins would continue to remain under pressure given the fact that eventually rates need to come down. Q: People seem to believe that as rates come off, maybe the investment cycle will be galvanized and the growth problem will get addressed. The calculation that you just read out seems to indicate that if you get 25-50 bps, the translation will probably be to the tune of 5 to 10 basis points. From talking to your clients do you get the sense that they are holding back investments or they are suffering because of 5-15 bps change in the lending rate?
A: You are absolutely right. In substantive terms on the P&L of most of the large players, 25 bps cut in rates is neither here nor there. It reduces the cost of manufacturing by less than 1 percent, but it has a huge impact on the intent of players to set up new capacity.
Sentiment is very important and rate cuts are central to that. At the top end, large corporates have the wherewithal, but not the appetite to set up something new. That needs to kick-start and therefore, the cut in rates is going to be a great booster to sentiment, just as the steps taken by the Finance Minister and the Finance Ministry for overseas investors have really perked up the sentiment over the last four or five months. Q: You were talking about how some of the drafts coming through private sector entities lead you to believe that their model might be more susceptible to the kind of allegations which have come through last week as opposed to public sector banks. What exactly were you alluding to?
A: There is compromise happening everywhere. Let me not really make a watertight divide between public and private sector banks. We see frauds all over the place and they happen in all banks. It is not that public sector banks do not have these frauds. But, one very common method for these frauds is that you get a remittance sent into an account and then it is siphoned out of that account.
It so happens that at least in our experience, a very large proportion of that does come from the private sector banks and when you hold onto those guys, you do not find them or you do not readily have an answer on the trail of funds or the source that withdrew them. What I am guessing is that this could happen because there is a lot of outsourced workforce which does deposit gathering and account opening in the model that many private sector banks follow. That is not to say that it is an infirmity.
We have to remedy situations as they happen. Hopefully, that will also happen and it is not as grave as it is being made out to be initially. Q: Would you say it is a problem from the point of view of not enough regulatory strictures being put in place or problem within the internal workings of the bank itself. Would that mean the banks should be lower on branding?
A: On regulation, KYC guidelines are quite stringent and very, very comprehensive. It is individual operational failure at the ground level. That is something which nobody can check 100 percent in a large operation. But yes, as it happens with all kinds of compromises, you live and learn. What has come to the fore will help banks tighten their processes to see that the regulatory framework is adhered to and implemented in letter and spirit. Q: What is happening with Kingfisher Airlines and whether or not any headway has been made in terms of recovering your loans? Any development since the Consortium of Banks had come to a decision regarding Kingfisher?
A: It is suffice to say that as of now, lenders seem to be heading towards enforcing their securities. Given the fact that there are 16 to 17 banks in the consortium, that itself is an involved exercise. Every bank has to give its own board approvals and a core group of bankers will decide on a common line of action.
But yes, unfortunately as of now, it appears that this account is headed towards recovery through enforcement of security. I would still hope very fervently that a better option evolves. For now I think bankers are proceeding on that route. Q: I believe that you have upped your loan growth forecast in the last month from what you were holding forth in 2012. Has anything exceptional happened in the month of February to result in that spike or do you see business as usual picking up?
A: It is business as usual. That particular comment about 20 or 21 percent was possibly picked up a little out of context. What has happened is that our current Y-o-Y growth is at 19 percent and therefore, it could raise the hope that this 19 percent could go to 20 percent or even more if there is a last 15 day off take, which often happens.
What we need to factor in however is that there was a very large off take of about Rs 24,000 crore in the last fortnight of last fiscal as well. So the base that we are looking at today for Y-o-Y is not the base that was available on March 31. We really do not know, it could be 20 percent, 18 percent or 17 percent. We will need to see how much credit is picked up in the next 12 or 14 days.