Consensus seems to be pause by RBI's MPC, says SBI chairman C S Setty

C S Setty says effective liability management will help the bank to protect its margin above 3%

State Bank of India is witnessing robust credit growth, including healthy corporate loan demand which is expected to see double digit growth this financial year. CS Setty, chairman of the country’s largest bank said effective liability management will help the bank to protect margin above 3 per cent in an interview with Manojit Saha & Abhijit Lele in Mumbai. Edited excerpts:

 

The Reserve Bank of India’s Monetary Policy Committee will announce the policy review later this week. Do you think the recent sharp depreciation of the rupee, along with the sluggish deposit growth, with system credit-deposit ratio above 80 per cent, could be a hindrance for reducing policy repo rates further?

 

For the policy repo rates, obviously don't think they are looking at the deposit mobilization.

 

Policy rate is dependent on the growth and inflation dynamics, at least that's what classical monetary theory says. While we have witnessed very robust growth in Q2, the modest inflation calls for some rate action. I think the robust growth rate is going to be a communication challenge for monetary policy in case the rate cut has to happen.

 

It is also a fact that the modest inflation is basically on account of food. That can turn any time the other way. So it all depends on RBI's monetary inflationary expectations, the inflationary trajectory. I think before the GDP numbers, it was a kind of a close call. And after the GDP numbers, I think everybody is looking for a pause. Broadly, the consensus seems to be to pause, but we'll have to wait and see.

 

How has been the credit growth so far? Are there pockets where you see overheating?

 

What we are witnessing is a robust credit growth. I think post GST reforms and also the income tax benefit, which was given in the first quarter, we said that we have revised our credit growth expectations to 12 -14 percent [FY26].

 

And that I think is a moderate growth. We are not witnessing any overheating or fearsome growth rates in any of the sectors.

 

Which are the sectors contributing to this growth?

 

The RAM sector {retail, agri, MSME}, if you see, have been growing in a very robust manner, 14 to 15 percent for the last several quarters. The new thing, what is happening is in terms of the corporate credit. We see a good growth coming there and we are hopeful that we'll be having a double digit around 10 percent. Q2 was a period when we saw it is picking up and now it is sustained.

 

Which are the areas that are driving corporate credit growth?

 

Corporate credit growth picks up from the working capital utilisation. Better working capital utilisation by the Indian companies.

 

The fiscal measures, as well as RBI measures in terms of providing liquidity and rate cut, have helped in terms of sustaining the consumption demand. And this sustained consumption demand first will prompt the corporates to utilise the working capital better. And this is what we have witnessed in Q2 and we are witnessing now also.

 

And the second is where we have approved the term loans, and the people start drawing them. And that also is very clearly visible. The third thing is where people are engaging with us that they would like to go for capital expenditure.

 

Yes, there are certain sectors which still are yet to see the capital expenditure, particularly steel, cement and all. Not much capital expenditure programmes are going on. Even if they are undertaking capital expenditure, some of the large companies in this sector have good cash balances, they are consuming their cash balances. But in other sectors where we have been seeing good growth, renewables, roads, data centres, refineries.

 

Coming to the liabilities side, do you think a rate cut by RBI will make deposit mobilisation further challenging?

 

See, more than rate cut, what we need to look at is, adequate availability of the liquidity in the system, which the RBI always try to provide. Apart from whatever MPC decision ism in terms of policy rate cut, we believe that RBI would be focusing on system liquidity adequately available. Whenever we see the credit growth, deposit will follow, deposits anyway people will mobilise and maybe pay a little more for bulk deposits to mobilise. My view is that RBI has been proactive, they did some open market operations. So going forward, expectations are that they will do OMOs, which will infuse liquidity to the system. The expectation is that there would be significant OMO and that will be taking care of the liquidity requirements.

 

Is there a need to party unwind excess SLR?

 

There is no need for unwinding. If the system liquidity is sufficient, our ability to access the market, because we have almost Rs 3.5 trillion excess SLR. And this level almost remains around that Rs 3.3 trillion to Rs 3.5 trillion. And our investment dynamics is that whenever you see credit growth, you put in credit growth. If you do not see credit growth, we have been investing in government securities and SDLs.

 

SBI’s credit deposit ratio was close to 69 per cent in Q2. Has it touched 70 per cent?

 

I think we are above 70 now. But there is no concern both on the liquidity side as well as the capital side. We believe that even if we have even outside chance of Rs 12 trillion credit growth, we can still comfortably support that. So even if you assume that 12 to 14% credit growth, it would just add maybe Rs 5 trillion or Rs 5.5 trillion over the year. So we have sufficient liquidity as well as equity buffers, capital buffers.

 

Do you see any further reduction in deposit rates?

 

On the fixed deposit, I think it would be difficult to cut. We must realize that despite that 100 bps repo rate cut, the fixed deposits have not been cut 100 bps.

 

Many of us are trying to increase the CASA.

 

We have not reached 45-46% CASA what we have had in COVID time. So system level, we should be looking at 38-39% CASA. It's a good CASA to have.

 

Within the banking system also, movement from savings bank to fixed deposit is so seamless. Cash management or the liquidity management at the individual level also shifted from just keeping the money in savings. So in the system level, there is significant growth in the fixed deposits.

 

So while CASA itself is coming down in absolute terms for some banks, for banks like us, it may not be coming down in absolute amount. But in percentage terms, it will be lower.

 

Also, because savings account rates are at historic lows?

 

The savings account essentially will become an operational account, which means that the ability of a bank to attract as many savings accounts, which become your primary savings account, is important. For instance, we open almost 70,000 to 75,000 accounts a day, which means that you are accretion to savings accounts.

 

What we have realized is that if our frontline staff say that you are opening a savings account means the purpose is to save. Why don't you fund or put money in this account? This asking for funding for the account has tremendously improved our position. Earlier, accounts which are open used to take longer time to fund. Today, 70 per cent of accounts which are open are funded within 90 days. This is a very big shift which has happened in our bank. Which means that your daily average balance are going up.

 

We are doing two things on the saving side. One is we are opening more and more salary accounts. Under the corporate salary package, we brought a lot of government departments,  and good quality multinational companies. Good quality Indian corporates also.

 

The average daily balance in a normal account is Rs 90,000 to Rs 1 lakh. But in corporate salary package accounts, it is as high as Rs 1.6 lakh to Rs 2 lakh.

 

Will all these steps ensure net interest margin will improve further?

 

Once you get the liability management right, this will help to reduce the cost of resources.

 

That is contributing to the protection of margin. Even if there is a rate cut in December, which seems to be a little close call, we should be able to protect it above 3 per cent.

 

What will be additional provision requirements for SBI while transitioning to expected credit loss (ECL) framework for loan loss provisioning?

 

It is too early to talk about the numbers. A few things that we need to focus on is what is the shape of final guidelines, even assuming that the current guidelines will be the final guidelines, we need to focus on refining the models, which SBI is very well prepared for. Just a slight tweaking here and there is required.

 

Number 2, how do you actually reorient your proactiveness in loan management in the sense that, for instance, today we do not have any significant provisioning on SMA 0, 1, 2. So SMA 2 itself will attract 5 percent. Whether 5 percent, what would be the final guidelines, let us see.

 

Have you sought any relaxation?

 

We did suggest some suggestions, not only in terms of modelling, there are many other things we have suggested. Let us wait for the final guidelines to come on the quantification of the impact. It is very important to realize that one is the impact itself would be manageable because of the long transition window which is available.

 

The second thing is, how do you prepare for the new dynamics? Most of the time what happens in many banks or lending institutions is that you are reactive. In the sense, when the account is moving towards SMA 2, unlikely to become NPA, you start engaging with the customer. So how do we manage your collections, even before it is SMA itself? In a portfolio of our nature, large amounts of collections happen automatically. Almost 70 percent of our retail loans other than SME and agriculture, any retail personal loan, home loan, personal loan, they all are received internally from savings account to the loan account. But we still have 20-30 percent which is not received like this.

 

RBI has also released draft norms for acquisition financing by Indian banks. How do you see this new area of financing?

 

I believe that this development is more in terms of putting confidence in the Indian banking system. We have not been allowed for several decades. This is definitely a good beginning . And there will be enough guardrails as they have said in the draft guidelines. We are engaging with them [RBI] how we can moderate the guidelines. We will definitely have the experience of funding the outbound transactions. Within India, it will be a calibrated approach, a prudent approach. We are not in a hurry to build a book on that.

 

We will be setting up a specialized acquisition financing unit within the corporate banking unit. And we would also use our merchant banking unit. SBI Caps will be a part of this unit. As a combination, we will do. There are MNC banks which have been doing this activity in India. We would also be collaborating with them. I think that is something what we have already started working on creating these teams. MNC banks obviously have good experience. We conveyed to them that we would be.

 

The draft caps funding 10 per cent of tier-1 capital. Do you think it is restrictive?

 

It can definitely be more. Now, the cap can be further enhanced. So, anyway we have given some suggestions there. But more importantly, even assuming that nothing changes in the guidelines. It is a good beginning.

 

There are talks about the next phase of consolidation among Indian banks. What will be the approach of SBI?

 

We don't have any formal communication from the government. As a majority shareholder, it's the government’s call.

 

The previous round of consolidation definitely helped the public sector banks. It brought the scale, scale of efficiency. And their ability to invest in technology.

 

So, consolidation from that angle is definitely something value accretive. And from SBI point of view, I think we have always been having a reasonable size post our consolidation of the associated banks. And we just crossed Rs 100 trillion business levels. So, obviously our focus would be on growing organically.

 

SBI has crossed the Rs 100 trillion of business and $100 billion of market capitalisation. What is the next milestone?

 

That also shows our ability to grow at scale. And operate at scale. And operate at an asset quality best in the industry today. We take pride in building this scale and also maintaining the quality of our operations.

 

Market cap is definitely an endorsement of the various stakeholders. That we are doing something right. That gives the value of what we deserve. But we still feel that SBI deserves better valuation. There is a potential for Indian banks, at least 2-3 of us, to be in the top 20 by 2030.

 

SBI has announced the IPO of the asset management arm. When is the IPO of the general insurance arm expected?

 

It will take a little later, after the AMC probably. We will complete the AMC process and then we will look at the opportunity of SBI General Insurance.

 

What is the level of capital adequacy you want to maintain?

 

We would like to maintain a minimum capital adequacy ratio of 15%. After this Rs 25,000 crores QIP and if you take the notionally this 2 quarters profit, we are already 15.69 per cent. So through the cycle we would like to maintain the 15%.

 

And our estimate shows that with the current profitability, we may not require to raise capital next 5 to 6 years. We should be able to fund our credit growth without accessing the tier 1 capital. That is our internal assumption. And we will try to maintain common equity tier-1 capital (CET 1) of 12 per cent.