‘Plush liquidity presents us with the opportunity to cut costs’

Diwakar Gupta is often the public face of the country’s largest bank on any major policy issue. In his capacity as Managing Director and Chief Financial Officer, it is natural for the media as well as the analyst community to turn to him to throw light on a number of developments – which they do often and in large numbers. Gupta handles the multiple demands on him with unfailing good grace and cheer. Colleagues describe him as calm and cool. He often displays a remarkable capacity to explain his bank’s position with logic. His step-by-step approach often breaks down complex issues and enables his listeners to get a better idea of the bank’s strengths and weaknesses.

Gupta has held this position for one and half years now. Prior to this, he served as Deputy Managing Director & GE (National Banking), at the Bank’s Corporate Centre in Mumbai.

A post-graduate in Physics, from University of Delhi, Gupta has over 38 years of varied experience in several spheres of banking. He has held prestigious assignments such as Chief General Manager at State Bank of Patiala, Chief General Manager of the SBI’s Mumbai Circle, General Manager (HR & Change Management) at Corporate Centre, and Head (Systems) at SBI’s Paris Branch. Prior to joining as DMD at Corporate Centre in January 2010, Gupta was the CEO of SBI Cards and Payments Services Pvt. Ltd, where he was credited with turning around the company.

Excerpts from the interview:

How is your bank coping with the repricing of liabilities considering the short tenor of a bulk of your deposits?

On the asset side the re-pricing is 70 per cent; on the liabilities side the duration is about two years. All deposits will re-price in two years. The bulk of our deposits (85-86 per cent of the time deposits) are in 1-3 year time bucket. Our book pretty much re-prices on both ends. But assets re-price fast as 70 per cent of the assets re-price in real time. And that is why there is risk of reduction in net interest margins (NIMs) as rates fall. It is all manageable as long as we give strong bottom-line performance.

Have you revised your credit growth targets because of falling demand?

I don’t think we have revised it. We still hope that our economy will revive and we will reach somewhere close to 18 per cent credit growth. A downward revision will come in the third quarter when nothing moves. We hope because inherently the economy has every thing in order to rebound and come back. It doesn’t serve any purpose for anybody to revise growth. At end of the day, even if it 14 to 15 per cent in doesn’t impact the balance sheet. The marginal business is only at a profit. I mean, we are broken even, our costs are all apportioned. So, whether credit growth happens at 8 or 10 or 14 or 18 per cent in all scenarios the net effect on the bottom line will only be positive.

Why did you cut the deposit rates?

Credit demand is muted; liability gathering is healthy; so what is my differential. What I am getting at an average 6.8 per cent (cost of funds), I am deploying in treasury at 7.5 per cent. I am making a near one per cent spread. This plush liquidity presents us with the opportunity to cut costs.

Has liquidity improved post SLR cut?

See SLR is pure liquidity, CRR is liquidity and profitability. As long as I don’t have a liquidity problem it is fine. The SLR cut is good insurance and so is MSF (marginal standing facility). Today, we have total liquidity capacity of Rs 90,000 crore. We have surplus liquidity of Rs 40,000 crore, undrawn refinance of Rs 10,000 crore and we have two per cent of the MSF. If push comes to shove, we can borrow under MSF.

If there is flush liquidity, why ask for CRR cut?

The CRR cut is a wish list for any banker because it adds to the bottom line. So what the Chairman is saying is that CRR is the tax on the banks. You put away the money and you don’t get remuneration on that. Whereas, the liability that has come in, is costing the bank something. The lower it is, the better it is for banks’ profitability. If you want liquidity, it can come through SLR or CRR is the same thing. The CRR is more preferred because it immediately gives you bottom line benefit. And we have passed all that bottom line benefit, the moment it came. We had a benefit of Rs 1,200 crore on a CRR cut of 1.25 per cent, we passed on Rs 1,600 crore benefit to our SME borrowers by way of rate cut.

Has SME asset quality improved after the rate cut?

Asset quality may not improve suddenly because the environment may not encourage that. But slippages might reduce.

Government had asked public sector banks to reduce the bulk deposit proportion. Wouldn’t this increase the competition in the retail deposit segment? But you have cut rates at the same time…?

It is a big risk we are taking. We are taking this risk only because we are hopeful that it will give other banks to cut rates without affecting their liability gathering. Ultimately how else will the lower interest rate regime come? Somebody has to start. We have started. The idea is not to make difficult for the others. Actually cutting rates on deposit is only the opportunity that we are trying to provide to the whole industry.

Will this be followed by a lending rate cut ?

When everybody cuts rate, everybody has a bigger margin. And eventually they can pass on some of its as lower rates on advances. It can begin to trigger a cycle of lower rates. What is coming in the way is the Rs 4 lakh crore of certificate of deposits (CDs) which are roaming around in the system. CDs are hot money and banks in their pursuit of top line growth have continued to borrow bulk at high rates and lending onwards at hardly any margin.

The problem is how you unwind it. But I think they should do it.

Can they unwind it?

There is some working capital demand loan kind of money. The 90-day money given at 10.5-10.75 per cent, they should unwind by just letting it mature.

How WDCL works is that it is carved out of the cash credit. Say, I have given Tatas a13 per cent limit. Tatas will never avail 13 per cent. I have the liquidity. So for three months I give you a working capital demand loan. You don’t renew after three months. You will lose the business, your balance sheet will contract but you also offset a CD.

Both sides go down but net-net you are in-the-money. And structurally you eliminate the imbalance which today the industry is seeing.

Otherwise liquidity problem will remain, high rates will remain. We find nobody else has changed rates. And if it is beginning to affect our growth in deposits, we will raise the rates.

Between commercial paper (CP) and CDs, it is CD part which is a bigger volume. What RBI is saying is right. We should not kill competition by regulation.

But you know there has to be balance between free market and regulated market.

When the rates were freed, banks started offering 8-8.5 per cent on 15 day deposits, forcing the RBI to comeback with caps when they had de-regulated!

> santosh.majeti@thehindu.co.in

> vageesh.nagarajan@thehindu.co.in

COMMENT NOW