‘Companies are not confident of demand. That’s unprecedented’

Pratip Chaudhuri, chairman, State Bank of India, the country’s largest lender, said there is very little happening in the economy to conclude that the investment cycle is back on rails. People aren’t confident of demand, Chaudhuri told Raj Nambisan, Parnika Sokhi and Megha Mandavia in an interview. The first part of edited excerpts:

What’s the feedback you are getting on the investment cycle? Are things better?
No, there’s not much happening. We have seen only two projects coming up — Hindalco’s brownfield expansion and the Tata Steel Kalinganagar project. They, too, have just started.

Is it a confidence issue?
Yes, that’s the most important thing: companies are not confident about demand. It’s something we haven’t seen before. Of course, there are cost and clearances issues, but confidence is missing.

What would be the key signal of a substantive turnaround?
It would be when the capital goods sector looks up. When L&T and Bhel say their order books are looking better.

That doesn’t look anytime soon...
That’s right.

Is a sustained interest-rate easing cycle on to help matters?
That will depend on what the RBI governor thinks, but it will be good if we are in one. I would suggest rather than cutting 50 bps after 6 months, the RBI should cut 25 bps every 3 months. That would be the time to call the trend.

To make matters worse, banks also seem to be facing structural liquidity issues. How do they get out of it?
It’s tough. We are adequately liquid but other banks will have to compete with other forms of savings to garner deposits. It’s a big challenge because deposits are losing their attractiveness compared with other forms of savings. Even within the financial savings space, there are alternatives. And, you see, over the last 3-4 years, the capital markets have gone nowhere. So people didn’t think of equity as a sensible investment and deposits did well. But now equities seem poised to do well. So, competition is turning severe for banks. They will have to scale up their deposit taking abilities.

On the spreads side, how is the picture for SBI?
I think we will maintain the 3.7-3.75% as guided.

The RBI governor wants that number to be in the 2.5% range…
(Shakes his head) I don’t know what it is based on. Across the globe, banks that are in retail have a margin on 3.3-3.4%. That’s because when you are in retail, you get cheaper deposits. But there is a cost attached. Now the RBI want us to do physical expansion, too, which will mean rising cost of distribution and set-up. Unless this is compensated by margins, how do you function?

Secondly, current spreads are not obscene. If you look at the Wells Fargo Bank in the US, which is a very retail entity, they have a spread of 3.3% — and remember, the absolute rates in the US are much, much lower than in India. Even for European banks, 2.7%-2.8% is the norm. So for Indian banks, considering the kind of risks they take, the kind of priority sector lending they do … and then we have to generate capital for Basel III….

How far away is the peakout of the bad-loan cycle?
I think it should take another quarter or two. Our exposure is to the good companies in the power sector. But in the same power sector, people are sitting with loans to discoms. Essentially, all risks are micro.

You have a concentration risk issue in the power sector...
We have Rs48,000 crore exposure to power infrastructure

What’s the solution there?
The distribution companies have to become viable. There’s no option. If it’s a strong balance-sheet company like NTPC or Power Grid, then it’s ok. Otherwise, all the power purchase and everything else is close to the distribution side of things.