Much-needed private investments to quicken the pace of economic expansion are just ‘around the corner’, State Bank of India (SBI) chairman Dinesh Kumar Khara tells Joel Rebello and MC Govardhana Rangan, pointing to aggregate capacity utilisation reaching thresholds that have historically prompted corporate boards to draw up expansion plans.
Mumbai-based SBI, which reported record profits topping Rs 50,000 crore last fiscal year, is the winner of ET Awards for Corporate Excellence in the Company of the Year category. In an interview touching upon a wide range of topics, Khara tells ET that India’s focus on building manufacturing muscle would further strengthen the growth capex trend and, in turn, banks that are expected to help finance India’s spectacular and exciting journey along the competitiveness gradient. Edited excerpts:
Last year turned out to be a blockbuster one for SBI — a wild swing from despair to joy. What has changed in the past three years?
There are a couple of reasons — a part of it comes from the macro and some part of it from the contribution from all the SBIians. It’s more like a citizenship of the bank. Since the macro was doing well in terms of the demand which was demonstrated during Covid and also the enabling ecosystem created by the government, it created a very positive environment for the bank. Covid was the first test of resilience of the banking system and of the State Bank of India. The other piece was the positivity in the organisation that helped us in getting the best out of everyone at SBI. And when they started tasting success, their confidence improved. Ensuring the timely delivery and keeping a very close eye in terms of the quality of the loan book helped us in generating interest income where we were not required to make any provisions.What were the few things that specifically made SBI stand out?
During Covid there were not enough opportunities for lending. But at the same time there are enough deposits. We went for the rupee dollar swaps and we supported our international balance sheet. We got into supply chain financing activity in our overseas operation. When we could see the demand coming up in India, we unwound those rupee dollar swaps and brought the money back and supported the growth in the domestic economy.
Did SBI shift its strategy post Covid?
During Covid there was a reasonable demand we saw for retail growth. We looked at opportunities and worked out what all solutions we can offer. So orientation was changed in terms of offering solutions as against selling the products. We were quite cognizant of the fact that recovery of the economy will depend upon the growth of the SMEs. So, we started investing in terms of the infrastructure for SME, and ensured that each of the zonal offices of the bank, which are more than 100 across the country, had a AGM level officer who was responsible for SME loans and brought the sanctioning committees nearer to the ground. We had taken up the task to scale up this SME business to around `4 lakh crore and I am happy to share that today we have already crossed the `4 lakh crore and much before the financial year 2023-24 target we had set. Our SME book has got perhaps one of the lowest gross NPA which is at 4.33%.
SME and retail were two untrustworthy segments for banks for decades. What changed?
We looked at the opportunities available and ensured that we have adequate infrastructure in place to ensure that we underwrite a quality book and we should have effective follow up… We came out with the loan management system. Now we have brought in the business division in SME. We came out with the pre-approved business loans. So we did a lot of work in this space and that is the reason why we can now see a Rs 4 lakh crore book which is very strong in terms of quality.
SBI is so huge that it couldn’t be just one or two. Where else did the changes happen?
Our agri book was also stagnating for many years at about Rs 2 lakh crore. At that point of time we said that we should take it to Rs 3 lakh crore and today we are almost at that number — Rs 2.92 lakh crore.
In terms of quality also, even in this book we used to have high gross NPA, now it has been brought into the single digit. In the SME space, we also took help from our large corporate relationships. We started mapping their vendor distributor ecosystem end to end so that they will have a very dependable supply chain and also at the same time we would have the visibility of the cash flows for these enterprises.
Suddenly the entire dynamics of reliability of this segment seems to have changed. What has changed in the last five years back that now everyone has become reliable?
There are a couple of things which have taken place in the ecosystem and this is essentially coming from the credit bureaus, particularly in the retail segment. Credit bureaus have changed the trajectory because there is enough and the clear visibility in terms of the credit history of the borrower. In retail, one should have the system structure in place unless and until the structure is well oiled, there can be challenges in retail. So that is the reason why we invested well in the structure. All our retail loans we have got the loan management system which are end to end digital and also it leaves hardly any discussion on ground and they are all having the business rule in general embedded into it. So when the scale goes up, there has to be uniformity in the underwriting standards. That is the reason why in our retail book, the gross NPA is actually less than 0.70%.
The Who’s Who of India Inc is your client. What are they saying about growth capex?
When it comes to private capex, there are different stages. Normally, it comes to the drawing board when the capacity utilization reaches somewhere around 75%. If we look at some of the numbers in 2022-23, we have seen the capital commitment to the tune of Rs 37 lakh crore by the private corporates. Also in the first half it is around Rs 20 lakh crore. When it comes to the growth in numbers there is always a lag between corporate credit and capital commitment. Once people have got a clear visibility of the demand, they start evaluating the options relating to the capex. The undisbursed limits for the term loans have been released. So that’s a very clear reflection that there is a definite departure as compared to the past. That gives us the confidence that the private capex is just around the corner.
Until it accelerates, it is only the government spending.
All the initiatives which have been taken by the government in terms of the infrastructure creation has also created an enabling environment because eventually the road and rail infrastructure which is getting created will lead to a situation where the logistic cost is going to come down. They are aiming to bring it down by half to about 7% and I think they are much on course. There is a very clear focus of orienting this economy to become manufacturing oriented. That also is going to be one of the other factors leading to even more capex commitments also.
Coming to regulations, the RBI appears to be worried about the high credit to deposit in the industry?
We are quite well placed at current levels at somewhere around 67-68%. The RBI is not prescribing any credit deposit ratio, but nevertheless, there has to be enough deposit base so that there is enough muscle in the banking system to lend. What I expect is banks will be even more careful, and choosy in terms of picking up the assets which they should support. So that is something that appears to be the potential outcome.
The CASA ratio of banks is coming down. One is the flight to term deposit. Is there a change in attitudes towards alternative risky investment options?
CASA before Covid used to be around 40% in the system, so, I would say that it is actually coming back to the same levels after going to around 44% during Covid because there were not enough opportunities for people to spend money. Now people are coming back to spending habits. That’s one aspect. The second aspect is that invariably we have seen that during inflationary times, there is a tendency on the part of all savers to put their money in high interest earning assets class. It is a part of the cycle.
What about the theory that youngsters are shifting to mutual funds, SIPs?
Banking system would be Rs 200 lakh crore, mutual fund industry would be about Rs 50 lakh crore, life insurance is about Rs 60 lakh crore. Pension fund is about Rs 10 lakh crore, and I think when it comes to the stock market, it would be about Rs 300 odd lakh crore. That is the broad composition. Even if youngsters are putting their money into SIP, they will route it through the banking system. That money in any case has to be channelised through the system only. There will be competition vis-a-vis the fixed deposit but it is the financial literacy which will perhaps eventually guide.
We have seen one massive merger that has caused this race for deposits. How is that going to play out?
Competition is a reality which none of us can ignore and obviously when it comes to banking to strike a fine balance between the cost of deposit and the returns which they will generate. So the fact remains that if at all you want to maintain the excellent asset quality, you should be in a position to lend at the most competitive rates and for lending at the most competitive rates, you must be in a position to keep a check on your cost of resources. It is a very fine balance which people have to maintain because there are multiple stakeholders whose aspirations must be honored.
The regulator appears to be worried about bulging retail loans. Are they a cause for worry?
In the retail segment, growth was at a very high pace, at about 30% for many of the entities and that too in the very low ticket size. A little greater analysis revealed that much of it was being given based upon the spending patterns, whereas prudent lending principle suggests that it should be based upon the ability of people to repay, which means that their EMI to NMI (Net Monthly Income) ratio becomes very critical. That is the reason why perhaps RBI came down on the unsecured loans. Such entities were not having enough recovery mechanisms in place. RBI came down with such prescriptions to ensure that there should be orderly growth in the system and there should not be unhealthy growth.
We have been used to this banks versus NBFC debate for a long time but now there is a new animal called Fintechs. How do you see them?
Across the globe, the financial sector is very tightly regulated. The safety and security of the system is a function of the safety and security of all the players who are there in the ecosystem. FinTechs have a capability, they are very agile, they are in a position to offer solutions to a problem and to that extent, they actually create value for the system. As an entity, we are consuming the services of Fintech. But, yes of course, being a regulated entity, this is something which is on the top of our mind always, that anything which we do, it should be in line with what is the prescription from the regulator. Whereas as a part of DNA, they are more independent in terms of their thinking, in terms of offering solutions. It is for the mutual benefit for fintechs to understand and appreciate the ecosystem and the regulatory environment and for entities like banks to consume their services so that even banks become nimble. Fintechs can, you know, play second fiddle or substitute the bank’s efforts rather than trying to be something on their own.
The banking system is probably the best of health in a long time with lowest NPAs, provisions. What could go wrong?
We have to stay ahead of the curve and for that we have to keep on investing in terms of understanding the evolving trends and how we should strengthen our risk management capabilities. Even in the good times, we are having a sharper focus on the risk management capability of the bank and we are investing well in terms of understanding the risk. We are having this sort of modelling for all kinds of risks. For the time being things look perfectly okay. We should have the mitigants in place. The fundamental principle is that the balance sheet should always remain strong
(The ET Awards 2023 ceremony was held in Mumbai on Friday, 15th March, 2024)
