Mumbai: Hemant Contractor, chief financial officer of the country’s largest lender, State Bank of India (SBI), is tipped to be one of its managing directors. In an interview with Mint, Contractor speaks about a range of issues from managing non-performing assets (NPA) to giving loans to telecom companies.
“So as far as our exposure to the telecom sector is concerned, we are not overly concerned about that. No new proposals are coming. But if a viable good proposal comes to us, we will still look at it,” he said. Edited excerpts:
What is the most critical challenge before the bank?
The most critical challenge is talent management. We are a very large organization and we have been growing at a fairly brisk pace and diversifying our activities that requires a lot of skills at all levels. We need adequate number of people, which is the biggest challenge.
There are concerns about the high level of NPAs in SBI.
As far as the NPAs are concerned, we are showing a lot of improvement. You might have noticed that in December quarter the gross NPA has actually come down. In terms of other NPA parameters, too, we have started showing an improvement. We expect this to continue in the current year as well. Our NPAs are slightly higher than the industry average, but we have taken a lot of measures to bring the issue under control. Those measures are now beginning to take effect.
What are these measures?
All our branches have been activated to look at the NPAs more closely and special teams have been deployed to oversee the high value NPAs. Senior officials look at all substantial NPAs individually. There are constant reviews at all levels.
Are these NPAs a result of a substantial amount of loan restructuring or aggressive expansion of loan book?
We were partly affected by the slowdown in the economy that took place in 2008-09. There was a certain amount of restructuring done, largely to take advantage of (the) Reserve Bank of India’s (RBI) special dispensation, which was available at that point of time. We grabbed that opportunity and restructured quite a few loans.
At the same time, we have been growing our loan book, with a compounded growth rate of 14-15%. That itself bring in a natural growth in NPAs. The rise in NPAs is a combination of both—the slowdown in the economy and the growth in our loan book.
The growth in SBI’s home loans has been quite aggressive in last year.
Our home loans have grown at 24-25% in fiscal year 2011. It’s not abnormally high. But, yes, we have been growing faster than the industry. There is no particular concern about the quality of our home loans.
SBI is now the largest mortgage lender in India, ahead of Housing Development Finance Corp. Ltd.
I’m not sure about the latest numbers. But,?yes,?we did overtake them some time last year.
RBI wants banks to set aside an additional 2% provisioning on the so-called teaser loan, but you haven’t done it.
The way we looked at the special home product is that it did not carry a higher element of risk as RBI perceived it. Therefore, we put forward our case to RBI that it should not be treated any differently from other home loan products. It was certainly not comparable to subprime loans in the US, where the characteristics of the product was quite different.
We felt that calling them teaser loans and treating them on a par with the teaser loans in the US was not appropriate. Therefore, we took it up with the RBI. They have a certain point of view; they are the regulator and we have to abide by what they say.
What have you told the regulator?
We are saying that it should be treated on a par with other home loans and not subject to additional provisioning. We have given the reason that it is not riskier than other home loan products.
Will you continue with the special home loan schemes in the future?
We are awaiting the response from RBI. After we hear from them, we will take a final call on the continuation of that product.
How much additional provisioning will you have to make?
The normal provisioning for home loans is 0.4%. For teaser loans, RBI has said that we have to step it up to 2%. For teaser loan alone we need to provide 1.6% of the portfolio.
Apart from that, we have been given a schedule to step up the provision coverage ratio (PCR) to 70% by September. It was 64% in December. We will take it up to 66.3% in March. To attain 70% PCR, we may have to do Rs 1,200-1,300 crore by September.
Is there any precedent of a bank taking on the regulator?
I don’t know whether there is precedence like this. But I think it is not a show of defiance. We felt that our stand was right. We gave valid arguments. We have differences, but and it’s not that we have been openly defiant.
Will you go to court on this?
We will respect the final opinion of the regulator and we will abide by that. There is no question about that.
What will be the capital requirement of SBI in the medium term?
Given our current rate of growth, we will need around Rs 21,000 crore in the next three to four years. Rights issue is what we have in mind now. We also intend to keep on visiting the market with retail bond issues, which helps us raise money as tier II capital. These are tradable instruments as well, which makes it more attractive for the retail customer. We may come with the next round of issue in three to four months.
Many telecom firms are being investigated in relation to the allocation of second-generation (2G) spectrum. Has this changed the approach of SBI towards the telecom sector?
We have always been very careful in lending to these companies. We have given to telecom companies project loans for rolling out the 2G operations. For one or two companies it’s for 3G (third-generation). Repayment capacity of the company and the roll-out plans are taken into account when we give loans.
We are not overly concerned about our exposure to the telecom sector. Unfortunately, what we have seen in the recent past is because of these issues, companies have gone into a shell. No new proposals are coming. But if a viable good proposal comes to us, we will still look at it.
Your approach to the real estate sector?
We never had much of an exposure to real estate. In fact, our exposure to real estate is probably less than 1% of our portfolio. Our exposure to the sector has actually shrunk this year. It is not a sector we have got into in a major way.
SBI has been opposing the savings rate deregulation.
We are not in favour of savings rate deregulation. Savings banks is a product which is similar to a current account, which can be used by customer almost at will without any restrictions on that. This is a stable deposit base for Indian banks. In fact, a large portion of this is treated as long-term core deposit. These core deposits are used for funding long-term projects.
If the savings bank rates are deregulated, then the interest rates will start fluctuating and it will make the product very volatile. It will affect banks’ ability to fund long-term projects. This is a very serious implication for that.
Some of the banks have started cutting deposit rates.
After the last hike in RBI’s policy rates, we said that we are not going to hike deposit rates for the time being. We will review the position. As of now, there is no plan to reduce rates.
Has the successive rate hikes by RBI affected the investment sentiment in India?
There has been a slowdown in investment activities, but I will not attribute that to the increases in interest rates.
First, not all the increases have been passed on to the borrowers. RBI has hiked its rates eight times last one year. Banks have increased their rates on three or four occasions in some cases. The entire increase has not been passed on to the borrowers. Quite a bit has been absorbed by banks themselves.
Does that mean that banks will see impact on their net interest margins, or NIMs, and profitability?
That may happen this year. There could be a slowdown or small shrinkage in the NIMs in the financial year 2011-12. We had good NIM of 3.4% in December. In March, I do not expect much of a change.
There has been a delay in appointments to key posts. Is it affecting the bank’s operations?
These things take time and it is a process that is followed in the government. Also, this is not the first time that a long period of waiting is happening.