Dinesh Kumar Khara, Chairman, SBI, says “deposit in the economy is a function of the overall liquidity in the system that is one part of the story. The other part is that if it is not in the banking system, it is either in mutual funds or life insurance. So the fact remains that these deposits are channelized into the economic activities either through the banking system or through the markets that remains a fact. Fiscal consolidation and the kind of taxation numbers in terms of GST etc. augur very well because eventually it should show up in sovereign rating. Eventually improvement in sovereign rating will also help in attracting global investment into the economy.”
The expression on your face is telling me that we are in for some surprises tomorrow.
Dinesh Kumar Khara: I think we will have to wait till tomorrow morning to know what is there in the numbers.
The Budget numbers, Mr. Khara, are impressive. The fiscal deficit number is quite impressive and one would say that this is a budget which just instills a lot of confidence in the government’s outlook for economic growth.
Dinesh Kumar Khara: You are right, absolutely. I think the way this Budget has come in with the kind of focus on the fiscal consolidation and also the kind of focus on the growth and that too led by infrastructure. Also the newer focus which has come in for the solarisation as well as for the housing for middle class and also in the rural sector, special thrust in these areas actually augurs very well in terms of the growth potential which it holds for the economy. And the way it will really roll out in the economy and various economic sectors will certainly be very positive for the overall growth for India.
Could the fact that the commitment towards capex has come down – because of the base effect and because of the government’s commitment towards fiscal deficit, have an indirect impact on the economy and especially infrastructure sector?
Dinesh Kumar Khara: I expect that normally this kind of government spend on infrastructure will certainly have the multiplier effect and I expect that even the private sector will also come in now. So it is going to be a combination of efforts by the government as well as the private sector and will eventually reflect in the growth numbers of the economy.
Can I assume that this is also an indirect message from the government and you are in a better position to perhaps give us the ground reality that in India finally that private sector nivesh ka mahakumbh, has started?
Dinesh Kumar Khara: Yes, naturally. Private sector investment is a function of their confidence in the growth potential and I think sustaining the infrastructure, keeping the fiscal deficit in check is a very clear reflection in terms of ensuring that the economy is healthy and if at all the economy remains healthy and this kind of fiscal numbers will actually give confidence to the international rating agencies, which also will lead to an improvement in the rating for the economy as a whole. So all this will move towards the lower interest rate trajectory which eventually is going to be for the ultimate good for the Indian economy and the Indian industry.
Looking at the way how the entire banking sector currently is moving, the war of liability still continues. If I use the private banking numbers for benchmarking purposes, it looks like banks will have to shell out that extra they will have to walk that extra mile to get deposits now. Do you think the concern on getting deposits and especially low cost deposits is a real concern and it is here to stay?
Dinesh Kumar Khara: Actually, deposit in the economy is a function of the overall liquidity in the system that is one part of the story. The other part is that if it is not in the banking system, it is either in mutual funds or life insurance. So the fact remains that these deposits are channelized into the economic activities either through the banking system or through the markets that remains a fact.
So eventually for supporting the higher economic activity in the economy, the need is to channelize the savings into investments. The other piece is that if at all the fiscal is the way it is, inclusion of the common debt paper in the global index will also attract foreign capital into the economy. So that will also be the additional source which will augment the lendable resources or the economic resources for supporting the growth in this economy. So the fiscal consolidation and the kind of taxation numbers in terms of GST etc. augur very well because eventually it should show up in sovereign rating. Eventually improvement in sovereign rating will also help in attracting global investment into the economy.
The fact is the fiscal deficit will come down, India will be part of the global bond index soon. The flow into bond markets would be extremely strong, which means that it will have a near-term impact on the yields. Are we in for a regime where we could be in for big treasury gains and a huge uptick in yields and that is positive for the banking sector?
Dinesh Kumar Khara: Yes, I would say that I expect likewise that it should be positive for the banking sector. And yields have already started trailing towards the lower side. And also the lower government borrowing from the system also will leave a room for, it will actually create a space for the private sector also to borrow. I think all these are factors which are eventually indicating that there is an ample opportunity and also there’s ample scope in terms of taking the economy to the next level. I think we would very soon be a $4 trillion economy in FY2025. And to become $5 trillion in FY2027-28 is almost certain at this kind of pace.
A concern which some of your peers have been flagging off is that India’s saving rates are dropping, money is moving into financial markets, while banks are happy that they are getting lot of fee-based income by selling mutual funds and opening brokerage accounts, that is coming at the cost of SA, which is having impact on the liability cost. Is this a sector-wide concern and a genuine concern?
Dinesh Kumar Khara: No, I would say that banks are always the channels through which the money moves, whether into investments or into deposits in the banking system. See, as far as channelization of the money is concerned, it will all happen through the banking system. So I think eventually, and that is something which helps the system as a whole to grow and also to support the other sub-segments or the financial sector also to grow.
Is there a worry about this drop in savings? The fact that money is moving into capital markets, equities, stocks and mutual funds? Is that not a worry?
Dinesh Kumar Khara: To my mind, it appears to be a temporary cause of concern, but eventually, in the overall context, money stays within the economy, for supporting economic activity. So far it is like that, it will only lead to enlarging the pie, and that enlarged pie also will create opportunities for the banking system for shoring up their deposits.
You mentioned that India will move from $4 trillion to $5 trillion to $10 trillion in the coming years. It is a matter of 5, 6 or 7 years. Where do you see a huge explosion of credit? Which sector do you think is going to give that booster to India and foreign bankers and for a bank that is the next growth frontier, where do you want to lend?
Dinesh Kumar Khara: I would say that perhaps there is an opportunity for all sectors to see the kind of growth in India and also be it rural, be it SME, be it corporate, be it retail. I think there is an opportunity for all the sectors to grow and perhaps almost at a uniform pace too.
When we started the year, the GDP growth estimate was about 6.5%, that RBI number has now gone to 7% plus, which means we are in for a surprise. You always said that SBI’s growth would be a function of the real GDP growth plus the nominal GDP growth plus 2%. So if I do the math here, what is your initial estimate at the beginning of the year, what is the nominal GDP and what your formula is, looks like we are in for some surprise.
Dinesh Kumar Khara: Let us see how it really pans out. What I mentioned was the formula which I believe is the nominal GDP plus inflation rate, something which is the likely determining factor for the loan book to grow.
The Reserve Bank of India raised a red flag, at least on the unsecured loans, and SBI has a large exposure to the retail book. What is your understanding of the risk which currently is there, at least in the unsecured/the retail category?
Dinesh Kumar Khara: As far as we are concerned, in State Bank of India, I have been saying in the past also and we will reiterate, for us as far as the quality of the unsecured is concerned, it is perhaps better than the secured, that is one.
Secondly, our unsecured is not actually unsecured, because we are lending to only those people who are maintaining their salary account, where we have got a very clear visibility in terms of the cash flows. So that is something which has led to a situation where the book which we are having is very different in terms of character as compared to perhaps the rest of the industry. But I would also like to mention that perhaps the RBI wanted to encourage growth, but they always wanted it should be healthy growth.
When it comes to retail, healthy growth means that the entity or the bank concerned should have elaborate structures to assess the risk, underwrite it, and they also must have effective collection machinery, so that the book remains intact. Because in the case of retail, very often we have seen there is a tendency. If at all it turns bad, it becomes very sticky. So that is the reason why RBI has taken some measures which ensures industry should witness a healthy growth in retail credit.
