Stagflation has appeared in India, just as it has in Western economies, in a throwback to the 1970s. To some extent there may be a spillover effect from the rest of the world. But the central bank's firm policy response squeezes earnings across the banking sector as lending slows. Even if the pause in growth is only that, issues of balance-sheet management arise.
Less than a year ago everyone was bullish. From the middle of this year they seem to be increasingly worried. In your view, is there anything fundamentally wrong with the economy, affecting the condition of banks?
I don't believe [so]. There hasn't been any domestic event in the past few months impacting the economy adversely. I think what is happening is more a function of what is going on elsewhere.
We should not forget that we are not a standalone economy insulated from the rest of the world, although our economic fundamentals are strong. The fear of contagion spreading from Europe and an overall economic slowdown in the Western world is bound to have an impact on business confidence, amplified in recent weeks in market reactions and asset prices.
At a macro level I do not see any great reason for India to worry - because of its huge domestic economy and young working population.
Realistically, there should not be any serious concern regarding the stability of India's banking system, since the direct exposure of Indian banks to potentially toxic assets is negligible.
But there will be an indirect impact on the asset quality of banks from global events impacting the economy. For example, if India's export-driven industrial sectors are affected, naturally there will be an increase in non-performing loans [there].
Credit growth has been muted across the banking sector, much lower than last year. We started the year with a target of 20 to 22 per cent loan growth; now it could be about 16 per cent. We expect a similar decline in the loan growth of other banks.
With clear signs of slowdown in the economy, and many projections of economic growth below 8 per cent this year, inflation has nevertheless been on the rise. Do you expect to see a pause in policy rate hikes?
In a meeting with the Reserve Bank of India (RBI) Governor [not so long ago], SBI's chairman and those of a number of other banks requested a pause. But ultimately the decision will depend on RBI's view on domestic inflation. If the inflationary pressures persist, I would expect the RBI to hike rates further; they have very little choice on that.
For banks like SBI [that's] not great news. The negative impact on lending, combined with an increase in NPLs from loan restructurings, is going to impact interest incomes and ultimately profitability.
What kind of an impact from the policy tightening are you anticipating for the current financial year?
For SBI the impact has been minimal. Interest margins have been healthy. At the end of the first quarter net interest margins (NIMs) were at 3.6 per cent, pretty strong. Despite all these stresses and strains, and interest rates being adverse to growth, we have been able to maintain strong NIMs.
Loan growth this year is modest compared to last year, but still we have a positive [figure], which will be reflected in our profitability. Industrial advances have been flat so far.
One good thing that has happened is good growth from the agricultural sector, where SBI is very strong. There has been fairly decent growth too in home loans, but not as much as last year. In the last quarter we witnessed strong growth in auto loans.
The rating agency Moody's last month downgraded SBI's credit rating. How do you expect this decision to impact the bank's cost of funds and ability to raise funds from the market?
I personally think it won't have any big impact. The downgrade was in relation to a particular debt instrument floated in 2007, which is not very popular in any case, and the bank will not be floating another [of that type]. Our overall composite rating is still Baa2, which is one step better than India's sovereign rating of Baa3.
SBI recently doubled the size of its medium term note (MTN) programme from $5 billion to $10 billion. Given the backdrop of the current economic environment, as well as the rating watch on the bank, is it feasible to raise money abroad?
The rating action could result in a slight increase in the cost of borrowing, but the availability of funds in the market will have a greater impact on spreads. In that regard, the turmoil in the euro zone is a threat to global liquidity.
One of the factors Moody's highlighted for its rating action was the depletion of capital. SBI reported a tier-1 capital ratio of 7.6 per cent at the end of June, i.e. below the 8 per cent level the government had pledged to maintain in state-owned banks. Can we expect to see a capital addition soon?
We do need to increase our capital. We will be soon going for a rights issue. When we come out with [that], we expect the government to subscribe to its proportionate share. The government owns a 59 per cent stake in SBI.
As far as overseas expansion is concerned, what will be your focus in the current year and next year?
Retail is one area we want to focus on in our overseas business. In Singapore we have been able to make big progress with our model of retail expansion there. We want to replicate the same model in the UK and eventually in Canada. So far in the UK we have been focused more on the wholesale part of the business. In initial stages we expect more business to come from the Indian expatriate community because they are already familiar with us. But eventually we want to penetrate the whole spectrum of retail banking market in the UK and Canada in a big way.
SBI has been trying for a banking licence in the UAE for several years. Is there any progress on that? Do you have any plan to roll out your retail business here?
Our application for a banking licence is before the UAE Central Bank. Currently we operate in the Dubai International Financial Centre (DIFC) with a Category 1 licence from Dubai Financial Services Authority. This licence does not allow us to offer our full range of banking services in the UAE.
The bank has recently launched a range of services for non-resident Indians (NRIs) through its DIFC branch. The bank now offers all the NRI banking services that a representative office may offer. The bank will retain its focus on corporate products and trade finance and consolidate its existing operations from the DIFC.
The writer is Deputy Business Editor, Gulf News
