When competition pushed down the interest rate on State Bank of India home loans during the recent festival season, it surprised players in the banking ecosystem why the bank did not respond to this bold move.
SBI Chair Dinesh Kumar Khara has a pragmatic answer to this question. He says he doesn’t want to be an opportunist and would rather offer a home loan at a 6.70 percent interest rate for a lasting term.
In an interaction, with Activity area, the head of India’s largest bank, with total business of 63.40 lakh crore at the end of September 2021, explained why some companies are turning to fixed rate loans and how SBI’s balance sheet has been strengthened against possible slippages, among other problems facing the banking sector. Extracts:
Why didn’t you step up to the plate when the competition drove you down on mortgage rates?
Their offer is for a very short time. I don’t want to be an opportunist. I would prefer to offer a home loan at an interest rate of 6.70% for a lasting term. The way I see it is that the borrower takes a call based on the interest rate. I don’t want people to take a call thinking it’s about the interest rate, especially if it’s a long term loan. We were the first bank to lower mortgage interest rates (in September 2021 from 6.80% to 6.70%).
We have now also linked this interest rate with the scores of the credit bureaus. The interest rate is linked to the quality of the borrower in terms of risk. It was a very conscious call that we took.
In addition, when we set the interest rates on loans, we must take care of all stakeholders. We need to make sure that there is a reasonable amount of money that we create for the stakeholders who gave us the capital to lend. We don’t want to sacrifice anyone for the benefit of another stakeholder. I think if we can deliver fast delivery we have enough market and we are doing well even at 6.70 percent.
All banks are too focused on growing retail credit. Is there not a risk of bubble formation?
Personal credit has developed well. Our CAGR for the past three years is 16% in retail loans. And if we (go back) a little longer, maybe five years, I think it’s around 24%. It seems to be more pronounced in the recent past because business credit has not grown as much. Sometimes a bubble is created, if at all, when the subscription is not up to par or the banks are not aware of the risks inherent in this type of subscription. The second reason why a bubble forms, if one does, is that people borrow beyond their repayment capacity.
In the current situation, we have taken out retail loans to our existing clients who have very good track records. And they are the ones who have their payday accounts with us – the majority of them when it comes to unsecured loans. When it comes to our home loans, a segment where we are the largest provider in the country, we give due consideration to credit bureaus ratings / scores. Thus, we have ensured that our underwriting standards are strong. We have strong underwriting principles that support us in terms of building a healthy portfolio. We have the collection machines in the field. We have beefed up that machinery because we are tackling retail. We have insulated the bank’s balance sheet from the potential risk that could emerge from any kind of bubble.
Your RAM portfolio (retail, agriculture and MSMEs) is now at 65%, with business loans accounting for the balance. Is this an ideal composition for a loan portfolio?
In my opinion, an ideal portfolio mix that a bank can handle well … and as long as our current loan portfolio continues to generate interest income … I think we are in a safe zone as far as concerns the composition.
Why are borrowers especially India Inc moving towards fixed interest rate loans?
What normally happens is that when it comes to the behavior of yields, we have seen that the short-term yield is normally the one that dictates the long-term yield curve. The variable repo rate has recently hovered around 4 percent. Perhaps the repo rate could undergo a change at some point.
And also, it is a reflection of the increased demand for credit. So the way I look at it is that these are the trends that are seen by some of the companies and they would like to lock in their debt obligations. That is why they opt for fixed interest rate loans.
Is there a risk that the accounts restructured under the RBI’s resolution for Covid-19 stress will slip?
So in terms of slippage, we did an assessment of our book. Cash flow was disrupted almost in no time with the Covid outbreak. But, the ability to repair cash flow is also significantly strong. With the opening of the economy, cash flow is recovering. This is also what we have seen. And the validation of this behavior is also seen in the type of repayment behavior that we have seen in the last quarter.
So, having said that, now, as far as our bank is concerned, we have done a restructuring of about 30,000 yen and on that, the probability of normal course default when we looked at our data, was about 30 percent. But I expect it to be much less in this portfolio for the reasons I just described.
And we did the supply (6,181 crore). Also, part of the loans, which we have given to these MSMEs, fall under the secured emergency line of credit, which is a first loss guarantee system. So I think, more or less, we have already covered the potential risk due to any other slippage or stress that might constitute this particular portfolio.
In the second quarter, SBI posted the highest net profit of 7,627 crore. Can you maintain this performance?
I think there are a lot of variables when it comes to performance. In fact, the highlight of these moving parts is the bottom line, which is posted quarterly. Our goal is to constantly improve our performance. Hopefully we should be able to do this.
What is your vision for SBI?
When I took office (in October 2020), I indicated that we would aim for a return on assets of one and a return on equity of over 15%. We have achieved a RoA of 0.61 and a RoE of over 13%. We are at your fingertips when it comes to ROE. In terms of RoA, I think we should be able to improve ourselves.