The last two-and-a-half years have been tough for the Indian economy, and it certainly was not an easy ride for the chairman of India’s biggest bank. When Pratip Chaudhuri assumed charge as the boss of State Bank of India, he declared war against bad loans. However, a tough economy meant bad loans only kept stacking up and Chaudhuri kept battling the menace. As he looks back, he admits that even he did not expect the economy to face so much trouble. The last two-and-a-half years has taught the bank a lot of things about managing the bad loan problem.

Under his leadership, the bank has pushed more term loans as they are generally backed by collateral. In times of delinquency better value can be realised from these loans.

The outspoken banker, who steps down on September 30 (Monday), set off many discussions and debates in the banking circles. His view that the cash reserve ratio must be done away with ignited vigorous debates among top bankers and policymakers.

Chaudhuri believes that even a top bank must compete aggressively for public deposits and be anchored in boring, yet safe, banking fundamentals.

The SBI chief talked to Business Line about banking, economy, and his years at the helm.

Edited excerpts from the interview:

Looking back

I don’t look at the negatives. One must always look at the positives. In terms of the positives, I think the whole bank is more in sync, there is greater communication. When I took charge, there was a huge under-provisioning for pension. So, the share price fell from Rs 2,000 to Rs 1,400 and what it meant was that State Bank’s financial statements were not dependable or believable.

This is something that SBI had not experienced earlier. You can have a good year, you can have a bad year but how can a bank’s financial statements not be dependable? So, it was a huge credibility problem which I addressed. So the first six months went in that.

If you ask me piece by piece, the bank has become much stronger in the sense that we do not have a single penny of wholesale (bulk) deposits. Today, every bank, perhaps with the exception of one or two, relies largely on wholesale deposits. Our reliance on wholesale deposits is zero. We have only retail deposits.

For the customer, the branch is everything. So, we have invested a lot in branch both in terms of manpower and resources. All 15,000 branches of SBI are air-conditioned. Our staff dealwith customers in a more comfortable environment.

Then in terms of customer service, we have done away with prepayment penalty on loans because we do not think customers are hostages. If they get a better deal elsewhere, they can walk out. So, that keeps us on our toes as we realise that if we are not the best then the customer can walk away.

We were almost a non-player in the car loan business. So, we combined the best of McKinsey’s prescriptions and the best of branch banking. The McKinsey prescription took us to what is called the centralised processing cell. That has its advantages.

So, home loans processing happens in the cell because you need to scrutinise the title deeds better, examine legal aspects and the ticket size is large. But for car loans, people are not willing to wait for 15 days.

They want it (the loan), if not within two hours, at the most within two days. So, we gave the sanctioning power back to the branches.

In a bank, there are two categories of employees basically — the assistants and the officers. Much of the work being done by the officers today is routine. You see a cheque, tally the signature and pay. So, we have down-streamed much of the routine work. So, today even a staff with one year experience, if he agrees, we have given him an additional allowance. He can pay Rs 35,000 cash and transfer Rs 70,000 right at the first point of contact. We have seen overseas that people on the frontline have much greater powers. The idea is make the transaction turnaround time much quicker.

In terms of employee relations, I have been able to root out all indiscipline. Particularly, the officers association used to call for a strike every six months. Last two years, they have not called for a strike. I said, why strike when SBI pays more than other banks. You can blame me, if I pay less.

Bad loans

When I took over I didn’t realise the extent of the problem.

Let us say somebody is selling a product for Rs 50 and there are people producing it at Rs 20, Rs 30 or Rs 40. So at Rs 50, everybody makes money. But if the price drops to, let us say, Rs 37. So, people who are producing it at Rs 40 will have to either sell out or close down.

So, that is what happened to many accounts. When the demand was good, every cloth manufacturer benefited, every person benefited. But in the last two years, the demand situation has been extremely tight.

With the result the people, who had built up capacities when the cost was high, floundered. Therefore, the non-performing assets (NPAs) have been high.

Fixing the bad loans problem

I think we did not pay attention to borrowers’ external ratings. Also, we took over loan accounts from many other banks without looking at the external ratings. We have strengthened our credit policy framework.

We have decided we will not take over any account without external rating. So, that is going to help, and also we are trying to lend only to the top-rated corporates.

On the loans side, we had huge losses in some of the diamond-processing units. In diamond processing, unlike other businesses, there are no big fixed assets.

So, if the loss happens it is a huge loss. So, we have gone to the Export Credit Guarantee Corporation to insure all the export credit. Even if there is a default, 75 per cent (of the loan amount) will be covered.

And in the SME (small and medium enterprise) sector, units under the Rs 1 crore bracket are very vulnerable. So, we have made it compulsory that they should come under the Central Government’s Credit Guarantee Fund Trust for Micro and Small Enterprises scheme, and we bear the premium.

Earlier, people used to say why should we pay the premium? So we pay the premium and the there is no additional burden on the customer. It helps us to increase the coverage and de-risk the portfolio.

My preference is more for term loans relative to working capital loans. Earlier, 60 per cent of our loan portfolio comprised working capital loans and 40 per cent, term loans. Now it has changed — 65 per cent is term loan and 35 per cent, working capital.

Because our depositors put money with us for a fixed period, this money also has to go out for a fixed period. The working capital borrowers… today they borrow for 10 days and then after seven days, they don’t borrow. So what do you do with the surplus cash?

Term loan borrowers, generally, are covered by assets. So, in times of delinquency, we realise better value.

Recoveries

Recovery depends on what assets you have. Generally, if you have fixed assets, your recovery chances are better. Under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, notice is served and two months’ time is given to the borrower to discharge his liabilities, but Debt Recovery Tribunals (despite clear instructions from the Supreme Court that they cannot give stay order on SARFAESI) are still giving stay orders. And not one (order) has been justified.

Eventually, the stay order is lifted but in the process one to one-and-a-half years is lost, without any benefit to anybody. Secondly, we were not initiating winding up proceedings (against defaulters). We were only going after the security. But now a simultaneous winding up petition is a big deterrent.

Also, offices of the stressed assets management group which handles stressed accounts of over Rs 10 crore have been increased.

We are asking the GMs in the group to meet the customers and discuss the issue (recovery) threadbare. So, a lot more compromises are happening.

In the case of loans which were almost written off, the ones which were bad for five years, we have introduced a one per cent incentive scheme for staff. So, we have told them if you recover a bad debt, which has been in the portfolio for a long time, then you get one per cent incentive (subject to a maximum of Rs 1 lakh). It has helped.

The total recovery from our written-off accounts last year was Rs 1,050 crore. This year we have increased the incentive to 1.5 per cent (subject to a maximum of Rs 1.5 lakh per person).

Public sector banks are allowed to give one per cent as incentive to their staff. But my idea is to give it on visible parameters and give it on results. Here, if you get it (recover), you keep it (incentive). In fact in the US, this concept is called as “Eat what you kill.”

Transmission effect of RBI’s policy action on the base rate

Base rate is connected to the deposit rate. But the RBI expects that banks should change the rates if the repo rate is changed. However, banks do not borrow much in the repo market. When the RBI reduces the repo rate by 25 basis points (bps), they expect us to reduce the lending rates by 25 bps.

Now, the RBI had increased the effective rates (as signified by the Marginal Standing Facility) by 300 bps, can we increase lending rates by 300 bps? Now, this 7.50 per cent rate (repo rate) is just a signboard rate, because banks can only borrow 0.5 per cent of their deposits from the repo window.

So, the base rate and repo rate connection is very tenuous and weak.

Outlook on interest rates

Interest rates will depend on deposit rates. There is a mad scramble for deposits among banks.

Some banks are offering upwards of 10 per cent on deposits. So, if the cost of funds goes up, then the lending rates will also go up. So, it will depend on the trend of deposit rates.

Car loans and home loans will get costlier if the deposit rates increase. It (the lending rate) does not depend on the repo rate…the repo rate is immaterial — please throw it out of the window.

Rating agencies

Generally, by nature, rating agencies and even bankers are relatively pessimists. They like to think that the worst-case scenario is going to happen. They are like our grandmother, who would like to keep us covered, keep us protected. The debt analysts take a more conservative view. The same is the case with a bank analyst.

In sharp contrast, an equity analyst is more enterprising because he is paid for taking aggressive calls. If he gets the call right, he is paid higher. In the case of a debt or a rating agency analyst, he will be hanged or damned if he had not forecast a number. As they would like to protect their jobs and backsides, by nature the debt/credit rating analyst takes a more dim view.

Moody’s rating action

Moody’s action is justified from their viewpoint. But what have they done? They have brought down our rating from ‘Baa2’ to ‘Baa3’, which is equal to sovereign rating. They had put us one notch above sovereign rating. Now, in their view, you (SBI) depend to a large extent on sovereign capital and they brought (the rating) us down to the sovereign level.

Generally, it doesn’t help to argue or to question. That shows that you are in a denial mode. They (rating agencies) are like doctors. They are doing a health check-up.

The doctor may say that you are not exercising enough, you are becoming overweight. You say I am fine, I have been like this. Now, if you don’t like the doctor’s opinion then don’t go to the doctor. Rating agencies’ actions are a matter of opinion. But the whole world cannot do without the rating agencies.

Advice for the next SBI chief

My advice to the successor is to stick to the knitting. Banking is a very boring business, but you have to keep doing more of that. And don’t go so much into exotic products. Keep your feet on the ground.

Focus on being a strong retail bank, continue to strengthen and expand the deposit franchise, and handle the credit policy, procedures and administration more clearly.

satyanarayan.iyer@thehindu.co.in

ramkumar.k@thehindu.co.in

(This article was published on September 29, 2013)
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