CRR = 900 km metro, 25% larger economy

Pratip Chaudhuri, the chairman of the State Bank of India (SBI), will not cede ground. No way. He says the debate on the necessity of cash reserve ratio (CRR) is not dead and buried. It needs to be brought to the fore, and done away with to bolster the economy, the eminent banker told Raj Nambisan, Parnika Sokhi and Megha Mandavia, in an interview. Edited excerpts from the concluding part:

Is the cash reserve ratio (CRR) issue dead and buried?
No, no! The CRR, I think, is the biggest national waste. Of the Rs70 lakh crore in deposits, the Reserve Bank of India (RBI) impounds 4%. That’s Rs280,000 crore. And then you worry about infrastructure funding! All this money can go for infrastructure funding and all the citizens of India can have a metro. It costs Rs300 crore to build a km of underground metro. So you could have had 900 kms of metro with that money. Now, how many cities are there in India that need it? 20 cities? 900 km means 45 kms of metro for each of these cities.

What’s stopping the RBI?
I don’t know. It is a legacy issue. It is an absolutely unfair tax on banks and creates a non-level playing in the financial sector. I am surprised that until I raised the debate on this, it was lying dead and buried. Had we done away with CRR in the year 2000, our economy would have at least been 25% larger and the tax revenue would have been 25% more based on just the tax-to-GDP ratio. Also, you would have had 15% more people employed. So what a pain we have inflicted on ourselves! Which country goes through this? It’s unbelievable.

But then how will the RBI manage inflation? Just with policy rates?
Inflation management is best done by supply management. If you lower the interest rate, output goes up. If you produce more cement, automatically cement prices will come down. If you raise more lendable resources with a bank, automatically interest rates will come down. If you look at banks, it is a function of demand and supply. By cutting the CRR, we have increased the supply. The same applies to most of the sectors.

Coming to CASA, does CA in CASA matter at all these days?
It does. I had said that the RBI could think of reforming it. The current regime is quite oppressive. We can pay 1-2% interest on current account. A lot of money is lying idle in cash. At least a part of that comes in to current account. Today people feel it’s a waste. Take the money to the bank, pay cash deposit charges – all are costs. But if there is even 2% interest, people will pour it in.

How is the mortgage business doing? What are your key markets and ticket size?
We are growing by 30%, with metros being the big markets – and Pune is our biggest market. Our average ticket size is Rs14-15 lakh because we have smaller loans also. We have Pune, Bangalore, Gurgaon. These are very big markets.

Are loans given to mid-sized enterprises impairing your asset quality?
Not in particular. With collaterals, and depending on the rating of the company, they are not necessarily significant bad assets.

But slippages are hastening…
You are right. The pace of slippages have been more in mid-corporates, though.

What about retail loans?
Retail loans have held on very well. Personal loans have tended to be delinquent, but our personal loan business has entirely gone to SBI Cards.

Is the cards business with GE still bleeding?
It has turned around. We had lost a lot of money, but now it is turning around.

Would you be expanding it?
We are not insisting on physical expansion. We are saying expand, but in a prudent way. We are not asking them to become No. 1 card issuer. Do it with care, because many cards are free in the market. If you give a free card, you can really build up the issuance base. We are saying that you charge for the card and get in only the people whose creditworthiness is good.

What about asset-liability issues?
We don’t have any. In fact, we are doing the opposite. Globally, banks borrow short, lend long. In fact, we have 10-year Tier 2 bonds, which we are using for working capital. Indian banks’ portfolio is concentrated in working capital, which I think is counterproductive. Banks should go more for term loans because working capital can be substituted very easily. The working capital market is very crowded. You can use commercial papers other instruments... Even mutual funds and insurers can come in and lend to somebody for 3-6 months. What is difficult to substitute is a term loan. For example, take Indian Oil Corporation. If they want to borrow for the short-end, they will pay 8.5-8.6%. But if it has to borrow term, it will pay 10.5-11%. On a term, you get tenure premium, you get an asset cover and you get more optimum utilisation of your liabilities.

What’s SBI’s average tenure now?
It would be 3-3.5 years.

To lure deposits, you had removed the penalty for minimum balance. Has it worked?
It has been very helpful. It has given us a USP. We are a common man’s bank. We are drawing a lot of deposits from private banks, which are very heavy on charges.

In terms of loans, SBI had the plan of easing the balance transfer...
We have done away with prepayment penalty. You know the RBI says if you lengthen a term loan tenure, it could termed as restructuring. So, if it’s a 5-year term loan and I make it 7 years, it is like extending the tenure. That’s why there is not much activity on that front. But in home loans, many loans are getting taken over. About 20% of our business is coming from people shifting our mortgages to us.

Would you consider raising the 4% savings a/c rate?
We don’t think the savings bank account is that sensitive to interest rate. People use savings bank account more as a service, a facility, an arrangement. We offer 6.5% for 7-day deposits. But very little money comes in. People also want liquidity.

SBI’s credit growth is around 18%. Do you see the same trajectory in the third quarter too?
Absolutely yes. Right now, it is running at 18%  on-year. Deposits are running at 14%. We are not gung-ho on deposits because we have some extra liquidity. So, let that get absorbed first.