Rising interest rates to positively impact net interest margin: SBI chairman

State Bank of India Chairman Dinesh Kumar Khara

In an interaction on May 13, State Bank of India (SBI) chairman Dinesh Kumar Khara spoke about how the country's largest lender perceives potential interest rate hikes by the Reserve Bank of India (RBI) and loan growth and asset quality going forward. 

SBI reported a 41 percent surge in net profit for January-March to Rs 9,114 crore on a yearly basis due to decline in bad loans. The bank said that provisions for bad loans came down to nearly a third of the year ago level. Over the quarters, like most lenders, SBI has focused on building a safe retail loan book to protect the quality of its assets during the pandemic. Its non-performing asset ratios have also improved in recent quarters.

In the interview below, Khara speaks about the bank being in a position to achieve the target of 15 percent return on equity before 2024.

Edited excerpts:

What is the outlook on net interest margin?

About 75 percent of the book is linked to either MCLR (marginal cost of fund-based lending rate) or EBLR (external benchmark lending rate) or treasury bill. In such a scenario, when the interest rates are on the rise, we have the advantage because the loans are getting repriced from time to time, but when it comes to deposits, they always go up with a lag. So, I think I expect that it should have a positive impact going forward as far as the NIMs (net interest margin) of the bank are concerned. 

Considering that a large part of the banking system loan is repo-linked, do you feel that there will be more pressure on the retail segment given that the rate cycle is turning?

When it comes to personal loans, the yardstick for us is the EMI (equated monthly instalment) to NMI (net monthly income) ratio. Suppose the interest rates go up, and the salaries are also likely to be pre-COVID level: In such a situation, the EMI-to-NMI ratio is going to the advantage of the customer.

How concerning is inflation right now?

I think for an economy like ours, which is actually a developing economy, inflation is positive to some extent. Because in these inflationary conditions, if you leverage, it is to the advantage of the customer, both corporate and retail. 

Optically when the repo rate goes up 40 basis points, it gives an impression that probably it's a shock. But when you look into the overall context, it may not be.

Your return on equity (RoE) is currently 13.92 percent. By when will your target of 15 percent be met?

We had set a target by the year 2024. Currently, we have witnessed about 398 basis point improvement in a year. That gives us the confidence that we should achieve the aim much before the targeted date.

What is your guidance on loan growth?

Normally, we don't give any kind of future scenario outlook. But nevertheless, with the kind of trend I have seen till now in the current year, we are seeing that our loan book is growing faster than deposits. So I think that is something which gives me confidence that we should continue to see the kind of loan growth that you've seen in the past, both in retail as well as the corporate side.

Can you give us some details of where the corporate loan growth is coming from?

As far as the corporate loan book is concerned, most of the growth is related to infrastructure which is not reflected till now. We have also got an un-utilised working facility, which is about Rs 2 lakh crore. There is about Rs 4.60 lakh crore worth of proposals in the corporate space. We strongly believe that corporate credit growth will have a good climate. 

How will corporate loans be priced? 

The pricing is also a function of the liquidity in the system. So the recent attempt of RBI to increase the repo also means it will be sucking out about Rs 87,000 crore excess liquidity. So I think, as the liquidity gets rebalanced in the system, perhaps the pressure on the loan for the banks may not be as high. So I think perhaps it will lead to some kind of a readjustment in terms of pricing. The corporate loans will be rightly priced.

How do you expect retail loan demand to pan out in the current scenario?

The willingness of the retail borrowers will depend upon their NMI. If at all, they have felt the need for a house, they will certainly go for the mortgage, or for that matter, any personal loan. We are not seeing a demand issue.

Do you foresee any issue on re-payment of existing loans?

In terms of payment of existing loans, I don't think we have any concern. Obviously, we'll have to wait and watch what kind of investments will happen as we go forward if the lower rate of interest obviously has driven the home sales, right? So I think it's appropriate to wait for a couple of quarters and see how it plays out.

Any consideration on increasing the savings account interest rate?

The ALCO (assets and liabilities committee) is yet to decide on this. 

How much is the restructured book?

I think as far as our restructured book is concerned it is about Rs 30,000 crore which is actually less than 1.1 percent of our total loan book. Even for that we have adequate provisions. In fact, I would like to mention that in our provisions you will see a number which is almost about Rs 7,900 crore, which was earlier the COVID-related provision. Now we have kept this provision for the restructured book. 

Any signs of stress in the restructured book?

The restructured book is behaving pretty well. We have seen a situation where people have started repaying.

Does that mean you will stick to your guidance of keeping slippages below two percent of the total book?

We should be in a position to maintain that. Slippages will be in check.

Stress in agriculture loans continues to remain slightly elevated. Why is that?

Part of it is also attributed to the macroeconomy and most of it to the rural stress. Hopefully with better monsoons this year, we should see an improvement in the recovery climate. 

It appears you are bullish on co-lending in the agriculture sector…

We are getting into the co-lending kind of an arrangement in the agriculture and SME space (small and medium enterprises). We have seen that co-lending partners have got much better experience in terms of the quality of the book, and we will be riding on that. We expect that our agri portfolio should also improve.

What is the update on the National Asset Reconstruction Company? By when will it start taking bad assets?

We expect that it should happen soon.

We understand that there were some vacancies to be filled in the company.

They have already been filled. Some of them will require regulatory approval before being onboarded. Those are expected to come in the next few weeks.

What is your exposure to Future Group and Srei Group?

I normally don't discuss any account in particular, but I will just say that both these accounts are fully provided for in the books.

Any plans to upgrade YONO?

A request for proposal has been floated. The teams are already working on it. 

Is there a plan to make YONO a digital bank?

We have no such plan. We will rather like to build the muscle in the bank, and create value for all our stakeholders, including customers.

Any plans to monetise your subsidiaries?

We have to be very mindful of market realities. We have nurtured the subsidiaries well, and would like to take them to the market route at the appropriate time.

Has there been any impact on your overseas exposure because of the Russia-Ukraine crisis?

As far as our international operations are concerned, our presence in Russia is through a subsidiary. But it's a very small amount as compared to our overseas balance sheet. I don't think it will have any impact as far as our international operations are concerned.

What is your exposure to Sri Lanka?

Whatever exposure we have to Sri Lanka, it is all guaranteed by the government of India.

There was a recent loan offer SBI gave its employees for the LIC IPO. What kind of traction have you seen there?

I think the numbers are still to be compiled. But I think broadly, whoever wanted the loan got it. I think it is also important that employees had adequate funding.