No cartel on rate cut, but have to answer shareholders: SBI

State Bank of India Managing Director Diwakar Gupta Friday rejected the growing perception that banks were profiting from deliberately not passing on the cuts in repo and cash reserve ratio (CRR) rates to customers.

Finance Minister P Chidambaram on Thursday said that banks were "cautious" in passing on the rate cuts by the RBI, and that he would personally speak to the bank chiefs on this issue. "It is not cartelisation or a wilful action on the part of banks not to pass cuts," Gupta said in an interview to CNBC-TV18. Also read: RBI should ask why banks are not passing on rate cuts "Banks needs to see it (rate cut) translating on their bottom-line before they can cut it. Cash Reserve Ratio (CRR) cuts have been passed on. The repo cuts have not made an impact on the balance sheet yet," he said, adding that SBI has been cutting rates as far as possible. In an interview to CNBC-TV18, Gupta also disputed talk that Indian banks were enjoying fat net interest margins of over 3 percent, compared to their global counterparts and so had to do their bit towards nation-building by sacrificing a part of the margin. According to Gupta, there were several global banks which had net interest margins in the range of 3 percent. "We are comparing a 3 percent without adjusting credit costs. The international number that is quoted is actually net of credit costs. So margins are not high," Gupta said. Also, cutting lending rates by more than what was feasible in the name of national-duty would be counterproductive, Gupta said. That is because profits and retained earnings of banks would fall, and the government would then have to provide capital for the banks to be able to retain their capital adequacy ratio. There was the matter of accountability to shareholders as well. "We are quoted on the stock exchange. We go and raise Medium Term Notes (MTN). We go for Tier II bonds abroad. We have foreign investors and I do not know how much they appreciate the national duty argument," he said. On interest rates, Gupta felt the RBI should further cut interest rates because that was the only way economic growth could be revived. Market expectations of a cut in the benchmark repo rate at RBI's June 17 meet has receded with the rupee hovering around its record low. The widely held view is that the RBI may not lower the policy rate, as it would further weaken rupee and accelerate foreign fund outflows from government bonds. "There is no capex happening and a quick recovery on the manufacturing side is not visible. Therefore in my opinion today even if you are running a risk on the other side (rupee weakness) you have to go for growth. You can go for growth only if you are making manufacturing and business competitive, hence the rate cut," Gupta said. Below is the verbatim transcript of his interview on CNBC-TV18 Q: What the situation for State Bank of India (SBI) is in terms of companies that you have lent to where there is large amount of currency risk involved? Have you asked them to hedge? What kind of external commercial borrowings (ECB) does SBI hold at this point? A: As I have been saying SBI takes care to see that there is a hedge against all external exposure. It could be a natural hedge in terms of exports or it could be a hedge by way of an actual hedging product or it could be credit to those companies or groups which have strength in their group balance sheet and therefore they can negotiate the volatility. As far as we are concerned we are almost completely hedged, so we are not worried. As far as the exporters themselves are concerned, we are aware that ECBs are USD 1.125 billion or something as of now for the entire corporate sector and a 4-5 percent depreciation could mean an addition of anywhere between USD 20-40 million depending on the overall hedging for the country. That is about Rs 200 crore and certainly corporates will have to figure out how they will pass it on. They have weak pricing power today. Q: You would have heard the Finance Minister speaking yesterday about how public sector banks might have been too cautious in his words in passing down some of the rate cuts and he said he would pick up the phone and speak to each of you by the end of this month. How do you think that conversation will go? A: This has been clarified time and again and I was listening to the earlier speaker on your show today itself, it is not cartelisation or a wilful action on the part of banks not to pass cuts. Banks needs to see it translating on their bottom-line before they can cut it. Cash Reserve Ratio (CRR) cuts have been passed on but the repo cuts have not made an impact on the balance sheet yet. On CRR cuts the other argument is that deposits are not getting reprised. Deposits are not getting reprised only because there are high cost deposits in the system. We need to address that issue. For us we have been cutting rates. We have cut rates 25 basis points (bps) on the short-end just last week, but there is that much only you can do if the rest of the industry is not showing a downward trend. Q: Why should public sector banks be above national duty? I understand what you are saying, but you know what state run public sector oil companies have had to bear. They do not function on economic rationale, so isn’t it possible that state-run banks also maybe asked to make sacrifices on margins in the interest of national duty then to stoke up infrastructure spending etc. Why do you need to operate at 3.3 percent Net Interest Margin (NIM)? A: The 3.3 percent NIM is also something which has been quoted out of context. If you go by the international experience there are several countries in double digits, which have NIMs which are in 3 percent or in that range. We are comparing a 3 percent without adjusting credit costs. The international number that is quoted is actually net of credit costs. So, margins are not high, that is one quick comment. The other comment is that national duty is something which public sector banks do anyway and if they have a directive they will abide by the directive. Let us assume that we actually give a cut over and above what is the balance today, what will happen? Profitability will fall. Retained profits will fall. Government will have to put in capital for growth because eventually, if you have to be at a capital adequacy of 13 percent you need retained earnings. So it is a very vicious circle and that is really the problem for the banks. We are quoted on the stock exchange. We go and raise Medium Term Notes (MTN). We go for Tier II bonds abroad. We have foreign investors and I do not know how much they appreciate the national duty argument.
_PAGEBREAK_ Q: What is it that you expect to see from the credit policy come next week because expectations are extremely low this time given the global context we have going? A: Markets had factored in definitely a 25 bps cut till 10 days ago. The more optimistic of them were actually talking about a 50 bps cut and suddenly the rupee volatility has virtually dashed those hopes. Therefore, it is the classical debate between growth and stability. The arguments for not doing a rate cut are that the rupee has depreciated and this is going to increase imported inflation and the Current Account Deficit (CAD) is going to widen. There are counterarguments on either side. Staying with this argument when the rupee went from 45-58, the system has been fine. Foreign inflows have been robust. We have had USD 70 billion during this calendar. The Foreign Direct Investment (FDI) outlook is positive. Even the forward merchant segment for dollar demand is actually much better today, less than USD 1 billion against USD 14 billion in January. With global commodity prices remaining weak, I do not think we need to worry too much on CAD. Again in the period that the CAD actually went to 6 percent plus of GDP the rupee was reasonably stable. So there are arguments on both sides of this. Coming to growth; Index of Industrial Production (IIP) has come in at 2.3 percent, which is lower than expectation. If you take out the volatile products, apparel, rubber tubing - the actual growth is only 0.4 percent. If you look at completed projects, they are sharply down from last year. So there is no capex happening, and a quick recovery on the manufacturing side is not visible. Therefore, in my opinion today even if you are running a risk on the other side, you have to go for growth. You can go for growth only if you are making manufacturing and business competitive, hence the rate cut. Q: If there is no action on rates, but the Reserve Bank of India (RBI) has an equally dire outlook in terms of growth and how it is getting impacted. If the Finance Minister's comments yesterday do transform into some kind of directive, banks such as you will have to buckle down and provide easier rates for the system? A: We are already doing it. The fact of the matter is that we have the lowest base rate today that is 9.7 percent. All of agriculture credit is at 7 percent. At the top end banks do not have pricing power. The large corporates either have External Commercial Borrowings (ECB) or they have credit at virtually close to base rate anywhere between 9.95 percent and 10.5 percent. All home loans are at 9.95-10.15-10.2 percent. Car loans are at below 11 percent. So I do not know how much more the banking industry or SBI particularly can do to reduce rates. We have even been reducing deposit rates. We are the cheapest and who knows we will have another deposit rate cut before long. You cannot fight with market forces. It is like gold - you may do short-term measures to curb volatility, but it can never be a long-term measure to say that 8 percent duty on gold will remain. You will have alternate channels coming in. Q: How is the liquidity situation in the market right now? Is a CRR cut warranted only on that premise? A: The CRR cut is warranted because that will lead to power for banks to reduce rates. Liquidity Adjustment Facility (LAF) is at Rs 70,000 crore. I do not think at Rs 70,000 crore it is very heavily strained. There is a fair segment in the Rs 70,000 crore which is arbitrage. I have excess Statutory Liquidity Ratio (SLR), I will borrow against it. SBI may have borrowed Rs 20,000 crore of this Rs 70,000 crore, because we have SLRs in excess of the requirement. I do not think liquidity is much in strain. What is in strain is the bulk deposits, high cost deposits which the system needs to unwind. I remember there was some suggestion about a fortnight or three weeks ago that the government has excess balances because it was not spending. In the short-term maybe they need to be put into the banking sector so that the liquidity is so easy that banks can take a leap of faith and cut rates on deposits. We need some such trigger. There are banks which have got 60 percent bulk deposits plus Certificates of Deposit (CD). There is no way they can bring down rates. If 10 out of 25-26 public sector banks do not bring down rates, how do the others do it? It is not possible. For the depositor it is the same risk on the Government of India.