For the first time the intrinsic value of the State Bank of India is being acknowledged by the market, says Dinesh Kumar Khara, Chairman, SBI, in an interview with Nikunj Dalmia of ET NOW.
Things are looking up for SBI. It is the only large bank which has raised capital and where the moratorium numbers are surprisingly better than what even private banks have reported. What helped you?
We have not raised any equity. But we raised tier two bonds and tier one bonds as well. But for both the issues, we could create a benchmark and even raise some MTN also where the pricing was much lower than that raised by any Indian corporate in the recent past. That way, we have demonstrated to the world at large that global economies also have got confidence in India. That is one very important part.
The second part is that for the right kind of risk, people have enough appetite for investing and that is what has happened. Coming to the other question relating to quality, for the last couple of years, maintaining the balance sheet strength has been our major focus and that is the reason when it comes to our corporate book — the legacy book — we have provided almost 89%. In terms of the resolution percentage which happens through various channels and the one-time settlements which would be through the National Company Law Tribunal (NCLT), leaving aside a couple of outliers where we had actually realised almost about 90-95%, on an average our recovery percentage is in the range of 20 to 25%. If you go by that, we have made provision for about 89% of our corporate book.
So, we have factored in the potential shocks as far as the asset book is concerned. That is one of the major reasons why we are in a position to showcase much better quality. Apart from that, the underwriting practices have improved quite significantly. We have brought in place another intermediary layer known as the Credit Review Department. From the point of view of the corporate book, it has gone a long way in terms of improving our asset quality. We took this initiative about three years back. That has started paying off very well. The other aspect is about the collection effort on the ground and that has also been supplemented very well.
What is your view on the economy? Things are looking up now?
Yes, I fully agree with you. The kind of things that have happened right from the day of the pandemic and the way RBI came in and ensured that there should be enough liquidity all around — was a major game changer. That gave a whole lot of confidence in the financial sector entities and the next step was to ensure that NBFCs should not get into some kind of a liquidity crunch.
I would also say that the initiatives taken by the government to ensure that enough cash is left in the hands of those who really need it was another major step. All said and done, in the first quarter, we had seen a situation where there was hardly any economic activity but nevertheless, we had seen that some of the core sectors like iron and steel had started responding well.
From the second quarter onwards, we started seeing the unlock happening and even in the first quarter when there was a lockdown in the majority of the towns in the country, the rural economy was thriving, That was a major plus. From the second quarter onwards, wherever unlocking was happening, there was a definite revival of economic activity.
The third quarter saw confidence coming back. The news about the vaccine in the very beginning of this calendar year and the start of the vaccination process on January 16 went a long way in terms of rebuilding confidence.
Today, some of the sectors like auto, iron and steel, auto ancillaries, all the OEMs, some of the cotton exporters are all thriving. On top of it, the recent Budget announcements have been made to give a push to the infrastructure sector. It will certainly give a further boost to sectors like steel, cement. These are the core industries and when they get into the growth path, naturally the whole economy moves on to the growth path. It is expected that the GDP growth in year FY21-22 would be around 11%.
Normally we have seen that the credit growth in the system is slightly better than the growth in GDP. So, normally we will take a multiplier factor of 1.1. So with that kind of a situation for 11% GDP growth, I expect the credit growth to be somewhere around 12% to 13%.
Right from the beginning, at State Bank of India, we have seen our retail asset books continuing to grow at a very healthy pace. Not only that, the quality has been very good as well. These are some of the factors which gives me a very happy feeling about the economy and as well as the banks.
The challenge for SBI is that you have to take care of all the social obligations as ultimately State Bank of India is the country’s bank. On the other hand, what is good for social obligations is not good for shareholders. How would you manage?
I do not think so, I would not subscribe to this thought that what is good for the social obligation is not good for the shareholders. I believe in coexistence of all the sub segments of society. Even there, we have come across situations where when we lent money for supporting the social obligations, it has gone a long way in terms of supporting the economy.
For instance, when we started our Jan Dhan Account, it was a zero balance account. Any bank, if they had a near-term perspective, would have seen it more as a liability and as an expense. But we went ahead and opened all those accounts, and today the average balance in each of these account is not less than Rs 2000. That means that we have been in a position to channelise the savings of the largest sub segment of the economy and you would probably agree that it will go a long way in terms of formalising this economy.
With the economy set fot 11% GDP growth, I expect the credit growth to be somewhere around 12% to 13%.Dinesh Kumar Khara
Once the formalisation happens, it is for the good of the banking system. We have to look at it in these terms and similarly when we are supporting people for setting up their ventures through various activities which could be even Mudra loans etc, it is generating employment on ground. As far as the quality of these advances are concerned, it is a journey we have to guide them through. We have created financial literacy centres all across the country. The idea is to really educate people about the benefit of borrowing and repaying on time. It is an investment for building up this economy and the more we invest, the more we will reap the fruits going forward.
How did you convince your employees to stay motivated during the pandemic? The ATMs never dried up, the bank accounts were always working. People’s money was safe. We are looking at an army of about 200,000 people.
In this fight against Covid, all of us were together. We have always communicated with them, we have conveyed to them that we are equally concerned and also we ensured that they follow the protocol right from day one. So depending upon the local administration guidelines in terms of how many people can come and attend the offices, we always ensure that we are fully compliant with the local administration and ensure that our people should follow all the protocols required for maintaining safe distance.
Secondly, our leadership constantly communicates with the workforce and very proactive steps are taken to ensure that the anybody who has suffered from Covid, is extended the treatment in time. We have health workers in our system who have proved their worth quite a lot during this period. They have ensured that not a single person goes unattended.
At the corporate centre, we are very closely monitoring what is the kind of a situation all across the country and wherever required, we have guided them on ground. Partly, it was the precautions taken by people, partly management and our employees being cognisant of the fact that we have to render uninterrupted services and ensure that the wheel of the economy keeps moving. It was a national cause and we demonstrated that we are very much part of this fight against Covid and we will see to it that the economy does not suffer.
Did you get a smile on your face when you saw State Bank of India stock going up 15% after the numbers were out?
Of course! It was a big morale booster and it so happened on that day I was meeting the leadership of all the circles and I could see the enthusiasm in their mind and perhaps they all acknowledged the fact that for the first time the intrinsic value of the State Bank of India was being acknowledged by the market.
I am using a tag line saying elephants can also dance. Is the State Bank of India ready to dance now?
I would say that we have gathered the required muscles for any elephant to dance. For dancing, the muscle has to be very strong so that is something which we are focussing on for quite some time and now I think we are in a position to dance.
So let us define what is in front of you. Muscle is CASA which you already have. There is a clear path to economy. Let us put the two together. Are you on the brink of a new credit cycle?
Yes, we have thought about how we should move forward. The retail engine is doing pretty well and so we will continue to consolidate on that. When it comes to the corporates, I would say that the SME and the large corporates would be the two. Capacity utilisation as of now is upward 55% in the economy. When I slice my book on corporate advances, 70% would be about term loans and 30% would be on account of the working capital. Normally, capacity utilisation and the working capital go in sync. As the capacity utilisation improves, the working capital availment starts improving.
As of now, the working capital availment is not very high and that will be addressed. Secondly when the capacity utilisation moves towards say 70-75%, people will start looking for creating new capacity and that is when we will start seeing a lot of new investment proposals. It is not that we do not have investment proposals. We have got a very excellent pipeline when it comes to the infrastructure and road sector, but this pipeline will actually grow and that will show up in our credit growth numbers also.
Also, what we have seen is that when it comes to small ticket loans, co-lending is perhaps the way forward and that is how we would like to support our smaller SMEs. I would say that we have invested well in terms of creating our capability in terms of addressing the need of the economy and we are actually very eagerly waiting for the moments when we can start lending in a very big way.
Are you consciously trying to be number one in all the subsidiaries also with the exception of life insurance?
I would put it like this. We would like to have our natural market share. For all the financial sector activities, what matters most is the distribution. We in State Bank of India have the largest distribution network of more than 22,000 branches, various sub-segments of the financial sector for instance, insurance — both life and non-life — generally have a preponderance of the agency channel. Our companies also have those channels. They have got the additional advantage of the bancassurance.
Similarly, when it comes to the asset management company, we have all the channels. We are into bank, IFA, we are into national distribution and we are also in corporate distributions. We are ensuring that all our companies are equally vibrant. In addition to that, they should have very active bancassurance channels, working like a second engine for all of them. It is my natural ambition that we should be all number one.
The home loan market is a very competitive one. You are growing a market where competition is large and technology is at play. Why are you so keen to grow that business?
In a portfolio, there are various sub components. I feel home loan is one such activity which actually encourages the core sector quite a lot. Unless and ,until home loan grows, the core sector growth can get stagnated. Being the largest player and having the largest reach, we are trying to see how we can improve the efficiency in operations.
Efficiency in operations will help us in cutting our costs. Our credit cost is already quite low as far as home loans are concerned. If at all, operating costs also come down and with the kind of CASA which we have, we would be rather the market leader in terms of pricing also. That is what my ambition is and I would actually like to price home loans at a right price point. A very large population of the country still has an aspiration to own home and the younger generation is also aspiring for home at a much early stage than earlier generations.
With transparency in pricing, we were in a position to encourage such people to come forward and acquire homes and help them to accomplish their dreams.
Do you think home loan rates and fixed deposit rates in India have bottomed out ?
When it comes to liabilities, the rates are also a function of the inflation and more so in a economy like ours where a very large population does not have the benefit of any kind of a social security. For them, the interest earned on the fixed deposit of the bank or for that matter the postal deposit is he main source of earning on an ongoing basis. We have to keep in mind the interest of a very large segment of depositors in mind but at the same time it is a very fine balance which we have to maintain. Ours is a growing economy. We have to ensure that the interest rate for the lending also should not go up significantly. That is something which keeps all of us busy in ensuring that the fine balance is always maintained.
We should be in a position to maintain the interest rates on deposits and may be home loan for some more time to come at this rate, but as far as deposit rates are concerned, it seems to have bottomed out.
One fault line and which is a legacy problem for SBI is the cost to income ratio. It is a challenge which you have inherited. How would you address that challenge?
I fully acknowledge that this is a major challenge and I would like to also mention that there are certain rigidities in the cost structure of the bank. I would rather like to focus more on the income stream. We have got about 23000 odd branches and we have started investing quite a lot in terms of the business correspondents (BC) and customer service point kiosks (CSP) also. Today we have got about 79,000 odd CSP kiosks. Wherever possible, we were trying to keep cost in check.
Secondly, we would like to significantly improve the income stream from each of these branches. I have actually given a call to my top leadership team to identify opportunities through which they will generate more and more income. It can be locker income, it can be cross sell income, it can be any fee-based income. For each of the branch, there will be a focus for generating income.
What about YES Bank?
When we went into YES Bank, the market reacted quite negatively for our stock but when we look back, it was a major step in ensuring the financial stability in this economy. If we start evaluating that decision, the way the bank is coming back on track, I would say it was the right decision at the right time.
But it will remain an investment and whenever the time comes, you would like to monetise it?
It will remain an investment but the time to monetise is not now.
Two-three years?
Time will tell how the market will be at that point of time. But nevertheless, I always believe that price is a refraction of the intrinsic value. Once the bank is on the right track, the market will reward it.
How do you want the world to remember your legacy? What is your vision?
Legacy is a derivative of what a particular leader does. From that point of view, I would say that I have got a very sharp focus on ensuring that the efficiency of operations are excellent and that should get reflected in the numbers in due course.
How has life changed for you in the last four-five months? Anything that keeps you wake up at night?
Discipline is very integral to the functioning of any CEO and that continues to be my area of focus also. But I have earmarked some time for myself and I normally try to stick to that. But if it involves travelling etc. then I have to compromise. So, there is a slight change in my disciplined behaviour or the schedule but apart from that, many of the priorities for the bank that keeps on engaging my mind and every new day is a new day for me.
What is the lighter side of Dinesh Khara which nobody knows?
I will have to think more about it, I do not know if at all I have any lighter side.