Mumbai: State Bank of India (SBI) chairman Pratip Chaudhuri says the massive provision that brought down the nation’s largest lender’s net profit in the March quarter by 98% was “a bold declaration and a bold disclosure” and “nothing is hidden under the carpet”. The last fiscal was a “lost year”, according to him, but the bank will soon be back to its “winning ways”.
As the system was flush with money, the bank went “very aggressive in search of assets” in the past, but now the approach will change. SBI will be choosy about the quality of growth and assets and it will create assets “only after understanding fully the underlying risk”.
In an interview, Chaudhuri also said the days of fighting with the regulator are over. “We do not wish to be in a state of perpetual conflict with the regulator... The whole approach is now of collaboration and understanding each other.” Edited excerpts:
Removing friction: Chaudhuri says SBI does not wish to be in a state of perpetual conflict with the regulator. Photo Abhijit Bhatlekar/Mint
When you took over the assignment, what was on top of your mind—bridge building with the regulator or cleaning up the balance sheet?
None of that. There was a bit of uncertainty and that was getting cleared because four of us had been interviewed (for the chairman’s post). Any of us would have been the chairman. It was too late in the evening and the thought process started only next morning.
At the earnings conference in Kolkata you used the term ‘clean up’ many times. Have you cleaned up fully?
Let us put it in perspective-there are two kinds of provisions. One is for actual delinquencies and the other is what the regulator wants you to provide for even though the asset is standard. Yet, another provision is on account of employee salary and pension.
With regard to delinquencies, I think we have adequately provided for. The additional provision that was made was Rs1,600 crore—Rs 500 crore for teaser loans and Rs1,100 crore for trying to reach the 70% provision coverage ratio prescription that the Reserve Bank of India (RBI) had given.
All along, the bank resisted the regulator’s directive. You knew there would be huge provision requirement for pension liability, but did not do that. Did the auditors ever raise any objection?
It’s not fair to blame the auditors. All along, even in the quarter ending December, the auditors were very insistent that Rs 500 crore for teaser loans should be provided for, but they were persuaded... In that meeting, even the RBI deputy governor (who is a board member) was present. The auditors were persuaded to believe that we are still working with RBI and if the regulator takes a more benign stance then possibly it would be out of the way, but once you make a provision, you can’t reverse it. The auditors were reasonable people. They said, yes you try your luck.
What about the huge pension liability?
That’s another thing and a little difficult to explain. I happened to sit on the board of five associate banks and I also interact with our nationalized banks. Nobody has been hit with a pension liability of this magnitude.
It is not by choice that we had to dip into the reserves, but Rs 8,000 crore is the number that is coming from the actuaries and the current profitability does not allow us to provide this much. One way would have been to debit it to the current profits. If we had done this, this year’s profits would have been zero; the EPS (earnings per share) would have been impacted and there would have been an absolute blood bath. It would have distorted all ratios. RBI allowed us to draw down from our reserves. We didn’t add anything to our book value—2011 is a lost year.
Couldn’t you have done it earlier, at least partially?
With hindsight, you can say that. It is true that in the first quarter of 2011 when the wage revision negotiations were going on, we did provide for a possible hike in the salary. And when you are negotiating for a salary, you also know that you have to hike the pension. In fact, we have been writing to the government to allow us to hike the pension. It’s a bit contradictory that on the one hand we are taking up with the government to allow us a hike in the pension, and on the other, we don’t want to make sure where the money is.
Was cleaning up the balance sheet an afterthought? You changed the profit and loss account at last moment.
It’s a collective decision. We found that the profit was not large enough to support a provision of this magnitude. So we decided to make a one-time exception and dip into the reserves, but make a bold declaration and a bold disclosure. Nothing is hidden under the carpet.
But Rs 25,000 crore investors’ wealth has been eroded. SBI has underperformed both Sensex and Bankex. And, at least some segments of the market doubt the non-performing assets (NPAs) numbers.
Investors know that business is not uniform. You have a good year and you have a bad year. There are normal challenges in the banking business in terms of delinquencies. So we tried to lay bare what all have led to this.
I assure you the additional provisioning is not so much due to deterioration in the asset quality. Even if the asset quality is 100% standard, you need to make additional provisions... But of all of them I think this pension liability is the hardest to explain.
About 15% of your restructured loans has turned bad. Analysts expect that more such loans will become non-performing assets (NPAs).
We will keep our eyes fixed on the net NPA number which is 1.63%. This is less than 1% for most nationalized banks and even our associate banks. Over the last five years we have been behind the industry curve.
Most of the restructured assets are covered by a security. They are cash poor, but asset rich. Where the underlying security is strong and cash flows are coming back, we would not see deterioration in the asset quality.
These are not fly-by-night operators; these accounts have been with us for 10, 20 may be 25 years. They have a regular business model. But in terms of impact of a slowing economy, we need to assess carefully because it has a multiplier effect. If real estate companies find it difficult to raise funds then payment to their suppliers gets delayed.
Are you seeing signs of such delays?
Not yet, because it takes time for these things to come to the fore. But we are constantly talking to our customers to see whether their payments are coming on time.
Your agriculture portfolio has seen massive deterioration.
This is a nationwide phenomenon, but we didn’t expect this. We are trying to de-risk our agriculture portfolio and linking the crop loans to crop insurance so that the delinquency would happen only if there is a crop failure and we will protect ourselves by taking the crop insurance.
Apart from ‘clean up’, you also hinted at ‘consolidation’. What does this mean—shrinkage in balance sheet?
The liquidity was in excess last two years and we went very aggressively in search of assets. The assets in the initial stages are all good as repayment starts after two years or so. We will now create assets only after understanding fully the underlying risk.
Does that mean you will grow less than the industry?
Not exactly. The loan growth will be a function of our growth in deposits. If we are able to mobilize deposits, then asset growth will happen. But we will be choosy about the quality of growth and the assets.
We have kept a loan growth target in the range of 16-19% against about 18-21% projected earlier. We are targeting about 21% deposit growth.
You have raised your seven-day deposit by 225 basis points to 6.25%. Won’t that impact your net interest margin?
We would expect it to go to 3.5% from 3.07% in March. Even if the short-term deposit rates are raised to 6.25% if we deploy the money for bill re- discounting at 9.25% we have a clear 3% spread.
So you will pay more to the depositors and charge more to the borrowers?
Not exactly. There is a huge gap between short-term and long term-deposit rates. We have tried to bridge the gap.
Capital is very critical for a large bank like yours which is systematically important. How hopeful are you about the rights issue. If it doesn’t work out, what choice do you have?
We are the flagship bank of the country and the government of India has all the time encouraged us. It has always been very supportive and very pragmatic about the capital requirements of the bank.
How do you bring back investor confidence?
We are doing an analyst meet within a week to explain threadbare all the detail. Investors are not expected to overpay for the rights issue. Our book value is in excess of Rs1,000 and the share price is about two times the book value. And mind you, SBI has not revalued any of its fixed assets. Whatever capital we have is for everybody to see, but that brings us to the question when you have plenty of something, but are not carefully using it. Maybe we had plenty of capital and we were not very prudent.
So, back to basic prudent banking?
Prudent banking; more capital-efficient banking. We will try to go for more loans, which are government-guaranteed and, therefore, need less capital.
No plan for stocks split to create liquidity for investors?
We will look at that, but first the capital stock has to increase.
You have four managing directors (MDs) now and some of them are doing deputy managing directors’ (DMDs) jobs. How is the structure different?
I think considering the size of SBI we should have eight MDs at least. DMDs were doing the MDs’ work because of the constraint of the number of MDs we can have. Shouldn’t we give them board positions?
Any other organizational change that you are contemplating?
It’s a time to introspect... We are looking at why our net interest margins are low, NPAs high… May be we have not deployed enough resources or not handled them optimally. We have been tinkering with the organization in the past few years. We need to assess the impact that it had and if it had a negative impact we may have to roll back some of the measures.
Are you referring to the modular structure at the zonal level?
That is under consideration and we are having wide-ranging consultation with our people to see whether the modular structure was better than the current structure.
You have already merged two associate banks with the parent. Will you merge others too? Want to become big like a Chinese bank?
The rationale for merger is not coming from the competition with Chinese banks. Even if we don’t merge, every month we pump in capital into them. In the current context, it’s difficult for these banks to find a place under the sun. The economic rationale for merger is as strong as ever, but merger has a cost in terms of profitability, capital and rationalization of the workforce. We merged State Bank of Indore in 2010 and I think the normal lead time to think of the next merger is two years.
You had plans to take your investment banking and insurance arms to the market.
Investment banking does not require a lot of capital, but insurance is a business which requires loads of capital. It depends on what approach Irda (Insurance Regulatory and Development Authority) takes…but whenever it happens I think our insurance company with the kind of track record would be a very welcome candidate in the capital market.
Immediately after you took over, you raised a white flag to the regulator by withdrawing the teaser loan scheme. Is everything fine with the regulator now?
We do not wish to be in a state of perpetual conflict with the regulator. We had one-on-one meetings with the governor and all the deputy governors and they have said that they have the highest respect for us as the largest regulated bank and we also said that we have the highest respect for our regulator.
So everything is fine.
Everything is fine and I am happy to tell you that we take the RBI inspection report as a medical check-up. Do you quarrel with your doctor if there is something wrong in your medical report? It is for you to correct.
But the bank had done that when RBI downgraded your rating.
That’s not in public domain… It always happens...you go back and try to reconcile. But they had raised some valid points in 2009.
Issues about corporate governance, quality of assets?
It raised issues about capital adequacy and quality of assets is an ongoing thing, but the whole approach is now of collaboration and understanding each other and RBI has also told us that if you do not agree with some of its prescriptions and observations you do not go to the press. You come to us and we will discuss it.
So it’s a new chapter?
That is the way it should be. I don’t know whether it was a different chapter earlier.
You have a tenure of two-and-a-half years. What do you want to achieve?
My objective would be to make the bank one among the top 50 in the world. We have to prove more by deeds than by words. Please watch our earnings in the next few quarters and I do not think that investors would be disappointed. I am confident in saying that we are back to our winning ways.
This is an edited transcript of an interview that was first telecast on Bloomberg UTV on Thursday.