Mumbai: Since October 2013, when she took over as State Bank of India’s first female chairman, Arundhati Bhattacharya has been at war with bad loans. Bhattacharya, who is overseeing the clean-up of the country’s largest bank’s balance sheet, says there is no doubt this was needed to be done, but added that banks should have had more tools to deal with the problem. You cannot go to war with bare hands, says Bhattacharya, who has come to be known for her plain-speaking. The bank’s top management has its hands full this year. Apart from improving asset quality, SBI has started the arduous process of merging five of its associate banks with itself. All this as SBI tries to keep pace with the rapid changes that technology is bringing to the banking sector. In an interview, Bhattacharya commented on the challenges faced by the nation’s largest bank. Edited excerpts:
You and the banking sector have just finished a difficult year. What are the priorities for this fiscal?
The first would be resolving all the stressed assets that we have now classified. It’s a very big priority. The second would be to get the merger done, properly, so that it happens in the manner that we want it to happen. The third would be to take forward the digital agenda, which continues to be very high on our list.
Are you glad that the process of cleaning up bad loans is finally happening? Or do you think banks needed more time?
I only think we should have had more weapons to fight this. You have to go to war with a sword and a shield. You cannot go to war with bare hands. We need to have these resolution mechanisms. Obviously, it is something that has to be done and there are no two ways about it. We are working very hard to get there, but the tools were not already available when the process started. I would have liked them to have been already available.
What is the path for the resolution of loans that have been classified as bad loans? Do you recover internally or sell to asset reconstruction companies (ARCs)? There are also some stressed asset funds being discussed.
It isn’t one thing or the other. There is no one solution that fits all. As you can understand, these accounts are of various types in nature. They are in various parts of the country, various sectors of the economy and even various ownership structures. So, obviously, the answers will also have to be different. We would like to use whatever is at our disposal, to get the things moving so that the wheels of the economy get moving, so to speak.
As you classify a large number of assets (to non-performing category), two things happen. One is that it is very difficult to maintain credit flow to such assets. Though the RBI mandates it and everybody tells us to do it, in reality, it is very difficult. The second thing that happens is that whenever there is a spike in NPAs (non-performing assets), in the way that it has happened in the last two quarters, there is a huge risk aversion that sets in. Both these reasons have an effect of slowing down credit. If you have to work around that, we have to ensure that the resolutions start happening quickly. That is what we are aiming for.
What are the funds that the banks are proposing?
We are looking at two funds, one which will look at last-mile funding and give the working capital that is required. We are also looking at taking over some of these assets and running them on our behalf, or taking them over ourselves. So, it would be various structures and it would not be one solution that fits everything. All of these things are going on simultaneously. We feel that we have been in this cycle for quite a long time, and maybe it is time that we dug ourselves out of it.
How do you plan to use the ARC route? The problem still remains the valuation at which assets are sold.
We are hoping that the recent change in law for ARCs, which allows for 100% FDI through the automatic route, will encourage a number of really large international ARCs to come here and set up shop. In terms of the valuation difference with the ARCs, what we have seen in the last one year is that their appetite itself has come down a lot. Their appetite was quite strong in 2014-15. In 2015-16, we haven’t really seen that play out. The reason is that the ARCs themselves also need to be better capitalized, because today they have to shell out 15% in cash.
Secondly, the ARCs that are there have not displayed turnaround acumen. Today, the ARCs that are required are those that can do a turnaround. I don’t think that Indian ARCs have that ability. Indian ARCs are more used to stripping and selling assets and this takes time. If it happened quickly, we would have done it ourselves. It takes about 5-6 years to get a decision from the courts, to get the order executed and then to get value from those assets. This is why the recovery that we were hoping for has not happened (from the ARC channel). Most of these assets are those that will go the hard recovery way and will get sold. For that, we have to wait.
Why are banks keen on a fund that does last-mile funding? Are they not in a position to do this themselves?
It is not that we are not in a position to provide funding. As I said, the risk aversion is very difficult to overcome. If something is already classified and you want to give them more money so that they ramp up capacity, it is very difficult to get it past a lot of bank boards. Each consortium has about 28-30 banks and that means that there are 28-30 boards which need to approve additional funding. What happens as a result is that working capital comes in driblets and that is a bad thing. That money is then used only to service interest instead of actually ramping up production. That way the company’s indebtedness goes up and its viability gets even further eroded. So, when you want to give working capital to someone, it has to be in the right quantity at the same time. In a fund, instead of 30 bank boards arriving at a decision, we will have one investment committee that will take a decision to give further loans.
What are your capital needs likely to be for the year?
For this year, we are very well capitalized. We haven’t even taken the real estate re-evaluation benefit that the RBI gave, yet. The growth we are looking for is around 12-14% this year, which we can manage with internal accruals. We are not really out in the market looking for capital as of now. We will see how growth sort of picks up. If it picks up nicely, then we will do some fund-raising, but not immediately. There are a lot of things that we can do. Non-core is something that we haven’t even started yet. Some other banks have actually sold their investments in insurance; we haven’t even done that. So, that is on the cards; real estate is also on the cards. We have a lot of space on Tier-2 capital, we have hardly done that. Even on Tier-1 capital, we have a lot of space.
The proposed merger of associates is a massive exercise. What are your plans? Is the time right?
We will try and do it as swiftly as possible, but it can’t be all on one day. That is unnecessarily clogging the system. But there will be one after the other. The swap ratios should come soon and we should be able to make progress this year.
One of my main agenda right from the beginning has been cost rationalization and we have done a lot of cost rationalization. We have really kept our overheads very tightly controlled at less than 10% as we had said we would. But there is a limit to this. At some point in time, we have realized that we have to take much deeper cuts. This is one of those times. There will be a lot of rationalization on our part. Currently, we have six corporate centres, six treasuries and six of everything. But we are doing almost the same thing. To put this all together will definitely give you a cost advantage as a lot of overlaps will go away. It will give a much better reach because with the same number of licences, I will have more branches. So, there are lots of cost benefits we can get out of this and I think the time is right.
Merging personnel and your asset book will be a tough part.
That is always the case because the HR (human resources) culture integration has to happen. And this is the biggest challenge rather than the others. Because two sets of people from two different organizations will be coming together. We will do as well as we can. It will obviously have maximum attention, and we hope we will have the support of the government. There is no written approval yet, but let’s hope to get the government permission.
In terms of the asset book, the associates have lent to more or less the same people we have lent to. So, to that extent, the overall exposures to some units will go up. In a way, it doesn’t matter because we were doing a consolidated balance sheet. In fact, it would be much better because of better control. We will be able to look at entire exposure at SBI itself and take decisions. I would think that going forward, it is good for the asset book.
What does your digitization drive entail?
We have a threefold channel strategy, i.e, a digital channel, a branch channel and a franchisee channel. Branch rationalization will happen in the sense that some of the branches will start looking different. Some of them may become more like e-corners with more machinery and less people. Some will look different in a way that they have specialized activities rather than providing everything. More than 74% of our financial transactions are already through digital channels and outside of the branch. But there are a lot of non-financial transactions. So, now our target is to see how much of the non-financial transactions can be done on the digital channel. And secondly, all the people who have migrated to ATMs, how many of them can be migrated to the non-cash channels. ATM is still a cash channel, we want to migrate it to the digital channel. Today, the push that we are giving is different from the push that we were giving two years back. Whatever we were aiming two years back, we have already achieved. We wanted to have more than 80% of financial transactions on digital, we are already there. It will happen shortly. But we need to go further, move out of cash and into PoS (point of sale). We need to ensure that whatever non-financial transactions that people are coming to us for, are able to do at the comfort of their homes.
To that extent, it is not only a question of putting transactions on the digital platform, it is a question of changing processes, it is a question of taking the consumer and understanding what they want and trying to give it at their fingertips and at their convenience. It is also a question of expanding reach in various ways. The reach is expanding not only through the digital channel but also through the franchisee channel. The business correspondents are a very important part of our story. We need to make sure that they are able to provide a bouquet of services which is right enough for them to earn a good living and rich enough for customers so that they get what they want.
It is a very broad strategy, but a nuanced one as well. If we go along these lines, we should be able to achieve what we want.
What is the end benefit for the bank?
The end benefit is, of course, gaining of market share and we will increase profitability because this is dependent upon the cost of doing business, and as you go more on the digital channel, the cost of doing business comes down, but your ability to address many more people goes up.
You have a payment banking joint venture with Reliance. Where does that fit in all of this?
There too, most of the issues have been sorted out. The shareholders agreement is about to be signed. I think the pilot roll-outs of (Reliance) Jio is also happening. So, we are more or less getting there and maybe another six months. I don’t have a timeline and that is for the majority owner to decide. But we are progressing. We have existed alongside of our associate banks for so long, it has never impacted our abilities. So, I see no reason why we cannot exist alongside a payments bank. Or rather the payment can’t exist alongside us.
Finally, do you see interest rates coming down or have they plateaued? Has the changed liquidity strategy helped?
Liquidity is much better now and we are hoping that it will remain so. Of course, it has to be tracked on a regular basis, which I am sure the RBI is doing. On bank lending rates, there are 3-4 reasons why there is a problem. In India, 97% of the sourcing is from deposits. So, when a repo rate change happens, only 3% is impacted by the cost of funds reduction. Second thing is even within this 97%, around 40% are CASA deposits, where the interest rate doesn’t change. So, you are only left with 57% where you can cut your deposit rates to pass on the benefit to the borrower. There again, there is a floor and that is the small savings rate. How much further below the floor can you go? Also, banks are de facto the social security for senior citizens. You cannot take bank interest rates very sharply down, you will lose your deposit franchise.
There is a way to pass on, and that is when you can make a lot of profits. One of the way to make profits is through treasury. But for that, bond yields have to come down. In the recent past, due to the tight liquidity conditions, we didn’t have the opportunity to profit from treasury because yields have not gone down as much as we would have liked them to. Another aspect is provisioning. We have made a huge amount of classification (into non-performing). Once you have made this, there is a timetable set out as to how much you need to set aside for provisions. First year is 15%, second year is 20% and so on. So, unless your resolution is fast, your requirement of provisions is very high. If that is the case, the banks cannot make themselves unprofitable.
But I wouldn’t say that rates have plateaued. We will try and bring it down to the extent possible as and when we see we are getting profits. But it will only come down slowly. If my resolution starts picking pace or my deposits come down, I will surely use that to cut. I will say that we will make our efforts to the extent possible. But we don’t see a very quick kind of downward movement.