Mumbai: State-run banks are more vulnerable than private sector lenders when it comes to accumulating bad assets as government-controlled banks focus on growing top line at any cost, said State Bank of India (SBI) chairman Pratip Chaudhuri, who will retire on Monday after about two-and-a-half years at the helm of the country’s largest lender.

Bad assets of the bank have grown during Chaudhuri’s tenure as the Indian economy slowed to a 5% growth rate in the year ended 31 March, the weakest in a decade.

In an interview, Chaudhuri spoke on issues ranging from shifting focus from working capital loans to term loans to luring customers of other banks through refinancing existing loans and taking on its unreasonable officers’ union.

He advised his successor to give freedom to the senior executives of the bank, but to be ready to micromanage if results are not coming. Edited excerpts:

You took on Kingfisher Airlines Ltd.

I don’t see it that way. We had supported it like no other bank, but when we found that the company’s revival prospect is weak, we had to take action. That’s how we have been trained. First, we try to go through a rehabilitation process. And then, very reluctantly, we go for recovery. State Bank had very long and protracted battles in many cases—Nirlon (Ltd), New Central Jute Mills (Co. Ltd) and many cases. The fight with Jaipur Udyog (Ltd) cost our former chairman R.K. Talwar his job. He was very determined to recover the loan and he had to relinquish his position as chairman.

This is purely a commercial transaction and there is nothing personal about it. Only when we find that the company is beyond redemption and the management has possibly not done enough to revive, we enforce this.

Mr (Vijay) Mallya is a prominent person and whatever we say about him or whatever he says about the bank gets flashed.

Are there many more cases like Kingfisher Airlines?

Who do you blame for rising bad assets—economic downturn or wilful defaulters?

It is largely the economic slowdown. There is a saying that conditions make an honest person dishonest. Nobody, to my mind, would like to be a defaulter by choice. It pains entrepreneurs who have built successful businesses to lose their reputation and stand in the dock. No company is comfortable being in default. But economic conditions are such that they are not having enough sales and they are not having enough profits. And the rules are so stringent that if you have committed yourself to a particular repayment schedule, you cannot alter it without becoming NPAs (non-performing assets).

Now there are some very good properties, hotels, but they have committed to, say, eight years of repayment period. The occupancy has dropped and they cannot pay off. We have financed a hotel in the US which is 10-years-old and we have given it a 15-year loan. Indian financial institutions and banks have not been lending beyond 5-10 years, so the industrialists thought it was wiser to take a 10-year loan, which is available as the alternative to that is not getting a loan. They all thought after five years they would renegotiate, which now has been disallowed.

As far as bad assets are concerned, have you seen the bottom?

So long as the Index of Industrial Production doesn’t show very robust growth, I don’t see the bottom. In classical economic terms, a recession is two consecutive terms of declining output. I would not go so much by projections and image of what they think—if I see two consecutive quarters of robust industrial production data, I will accept a turnaround. If it is declining, maybe there will be more trouble.

With the government pushing for reforms, have you seen any change in borrowers’ behaviour?

They are a little more confident now that the government has recognized the problem. Particularly the finance minister going down to five cities and meeting banks and individual companies has helped. Possibly they feel that their troubles have been recognized as widespread as national trouble. I think there is greater hope and possibly a greater determination to fight the situation.

Which are the most stressed sectors?

All risks are micro. NTPC (Ltd) and Tata Power Co. Ltd may not be stressed, but a large number of power companies are stressed. The weaker power companies who have single plants and weaker balance sheets are problem areas, and anybody dealing with state power distribution companies. Wherever there is a government-facing business, there’s a problem. Even the oil companies are not getting their dues in time... It all depends on who is paying you.

Agriculture is a stress area. Also, when the slowdown happened, the relatively smaller SMEs (small and medium enterprises) became more vulnerable as the large people defer payment to the smaller people.

As far as SBI is concerned, the stressed sectors are SME and MCG (mid-corporate group). About 8-9% of such assets are stressed. Anything can today become an NPA. If a very respected investment-grade company defaults in one CP (commercial paper) payment, it becomes an NPA.

All banks are operating in the same economic environment, but why are public sector banks more affected than private banks? Is ownership an issue?

It depends on how the owners drive you. In a private sector bank, the owners drive to generate more market cap. In a public sector bank, nobody asks you to generate market cap, but public sector banks go by top line. That’s the direction from the government.

Now suppose you are lagging behind in reaching the top-line target, you go out and start lending to anybody who takes unsecured loans. Public sector banks, except SBI, have lent a huge amount of unsecured loans. Look at the entire Air India loan—except for SBI, everybody else has given unsecured loans. Public sector banks go for top line and in a mindless manner. The 2007-2010 boom made us feel that any company can succeed.

In banking, our endeavour is to be the lowest-cost fund mobilizer and lend to the top-rated companies first. Of course, you have lend to do priority sector, but do it in a derisk manner.

Do public sector banks also lack skill in credit monitoring?

Partly yes, but partly also it’s due to the lack of orientation. In India, the whole government’s attitude is take a sick company to BIFR (Board for Industrial and Financial Reconstruction). Don’t allow an asset to close down. This is because if you close down, you lose the asset—you lose jobs.

We have a two-wheeler manufacturer in Kanpur—LML (Ltd). Now it has lost the plot. We found that it was not turning around, but we waited and waited... We are trained to be a rehabilitator. We are not trained to be writing a death prescription. You can’t change that overnight.

Are you vacating the retail space to competition?

No, not really. We are the most aggressive in gathering home loans. Our home loan rate is 10.1%—the lowest. In retail, 60-70% is home loan. We do the card business through a subsidiary and card has never been very big with us.

We found that the car loan is not so much financing an asset, but it is financing a person. So we have tightened the eligibility norms; unless a person earns 50,000 a month, I frankly can’t understand how he can afford running a car?

You have been very aggressive in pricing out competition. You are poaching other banks’ customers, refinancing loans...

Yes, efficient lenders should prevail. Our accounts were also taken away by others. We had given loans to SAIL (Steel Authority of India Ltd) and NTPC, but our management was oblivious and other banks came and financed this. Refinancing is very common globally.

There is a shift in business strategy in SBI. We are going for top-rated customers. The RBI (Reserve Bank of India) rules require capital requirement as per ratings—it is less for top-rated companies.

By history and by culture, we are more working-capital bankers. The Reserve Bank allowed term loans in banks in 1996, and till 1998 there was a ceiling of 500 crore. So, most of our generation has grown up as working-capital bankers. But today, asset-liability management is very important. The working-capital customer doesn’t take the loan on the first day, but a depositor wants interest from Day 1. In contrast, term loan stays all through. Besides, receivables—collateral for working loans—in a cashless situation evaporates, whereas for term-loan securities they are more enduring in a crunch situation and you find a buyer.

In the process, are you compromising on your net interest margin (NIM)?

Perhaps, but it works the other way. In working capital, NIM doesn’t pay for the full month, maybe only for 20 days. For the rest 10 days, you are lending in the interbank market.

You often pick fights with the regulator.

When I took over, there was as issue with teaser loans. It was a matter of interpretation—whether the loans were prudent or not. On those matters, you argue for a while and then accept the regulator.

On CRR (cash reserve ratio), I argued, but if RBI did not reduce the CRR, that’s the end of it. But you keep ventilating the views that you think are in the larger interest. I make a distinction between issues distinguishing a bank and the industry. When RBI said prepayment penalty is a retrograde step, I was the first to welcome it. RBI's overall view is that campus recruitment is not egalitarian and is not fair to all. I wholeheartedly supported that and we stopped all campus recruitment.

Now, the short-term rate and repo rate… The banks’ cost of funds is not dependent on the bond rate. So, it is not right to say that we have reduced the repo rate and banks are not transmitting. Now, what if the boot is on the other leg? We have increased the repo rate by 300 basis points (or 3 percentage points)). Why aren’t you saying that the banks have not raised and thank the banks?

I fought on principles. Nobody joined the debate. Our costs are linked to the deposit rate. If post office rates declined today, we will lower our rates.

Are you happy with the role of the government as owner?

The government directors bring in a lot of value. The positives of being a government-owned bank are huge. I can’t thank the government enough—it has infused 4,000 crore last year, and 7,900 crore the year before when we had almost gone down under. The government, in a sense, had infused life.

The things are overall good, but for our own sake, we should examine what can be better. Don’t stick to MoU (memorandum of understanding) on top line and bottom line. If you do that, then you don’t lose sleep when the banks’ shares tank.

The government must recognize that most of these companies are publicly held. Most government companies do not have huge floating stocks and many are not yet listed. Therefore, there is not enough orientation... Things as they are seen in Mumbai and in Delhi could be different.

Given a choice, what would you like to change in the bank?

Change for the sake of change is dangerous. One of the changes that we experimented with, the modular structure being dismantled, proved to be one of the reasons for bloated NPAs.

We should change the orientation of the people. It should be more result-oriented. The emphasis should be on execution rather than bureaucracy.

You handled the trade unions with an iron hand.

Our biggest trade union is the workmen’s staff, who are about 140,000. They are totally for the bank and I also respect them. We have an officer’s association—about 80,000 people. State Bank of India’s compensation for officers is best among the nationalized banks. Then why there should be a situation that...there is a strike in SBI and not in other banks? Do you know their demands? Introduction of five-day week. Can the SBI chairman say yes to that? So I said enough is enough and let us face this. Wherever we have gone to the court, we have won.

You also demoted people.

Many a time people ask us what are you going to offer to the customers. I said some branches should work seven days a week. Employees of BSNL, Air India, Indian Railways—all work seven days a week. But our people came out, demonstrating “Top management down, down." What is that? Where is the question of officers agitating? They get a handsome salary, housing allowance and 100 litres of petrol a month. They are not the struggling masses; they are aristocrats.

If we wanted, we could have dismissed them, but we did not as they are a part of us. But we wanted to give a message that this should not go unpunished. We have reduced their ranks by one. They will get 2,000 less salary, but the message is more symbolic.

Are there things you wanted to do but could not for lack of time?

Perhaps. One is the merger of associate banks. I think I would have liked it to happen, but it did not happen.

I have done quite a few other things which we were missing. We were not present in the point-of-sale machine category—we have done that. I have introduced an accident insurance product which we did not have. Also, now we have health insurance.

Is there any area of concern?

Not particularly, as we have fairly distributed decision-making. My advice to my successor would be that if you are changing anything significantly, communicate it to the staff. When I took over and when I took action against our staff, I went on video, addressed the entire staff in English and Hindi, and explained.

The second advice would be give your senior executives freedom, but if the results don’t come, start micromanaging.

What’s your plan after retirement?

I would be going back to Delhi by the end of October. There are a lot of invitations for speaking at seminars, etc. My service rules require that I cannot have any engagement with any company which is assisted by the bank. Every conceivable company that you can think of is associated with State Bank. I would not like to flout that. There is one-year cooling period. Meanwhile, I would like to spend time on fitness and maybe work with charities.

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