State Bank MD talks about sustainable credit growth, rise in NIM and liquidity

Credit growth numbers have improved both year-on-year and month-on-month. Is this just a sugar rush or this is here to stay?

Yes I agree with you. The credit growth is there and it is not a temporary credit growth in my view because this is driven by corporate growth to a substantial extent. Retail was always strong and therefore the corporate growth does not happen suddenly and does not go away suddenly.

These are plans which have been built up over the last two-three years when corporates were not growing, they were not coming to us. Even if they had loan sanctioned they were not drawing them and you have heard about the large amounts of working capital limits which were not utilised or term loans not drawn. This has been coming down from Q4 last year and therefore this growth which is investment into new projects and upgradation of the projects is a sustainable growth in my view.

Given that suddenly there seems to be a challenge in terms of growth outlook, inflation is back. The planned capex cycle which a lot of corporates have, is a combination of term-loan and working capital loan. Do you see that getting affected?

It is too early to say that because these capex cycles and these plans are not made suddenly. As I said, they have been making them and they have been planning for the last two-three years and we are now executing them. So I don’t think they will stop suddenly because of the rate hikes.

Once the rate hike settles down and they have taken a look at what these costs, the future capacity, etc, they may factor this in not for those which they are already executing because rates can go up or down but on the ground we do not see any impact so far.

We are also looking at a new turn in the interest rate cycle which is that the cost of deposits will get repriced and the cost of loans will get repriced. At what point in time do you think NIMs will start getting impacted because of this?

The deposits repricing will happen with a lag and the loan repricing because a lot of our loans are linked to the external benchmarks. They will be repriced first and initially there will be a pick up in the NIMs for us and also for the other banks in the system and subsequently over time, as the deposit rate hikes also get priced in, the NIMs will settle to the range which we normally have. At least for us 3.2-3.4% is the typical range we want to be in and which we have been in. This will ultimately settle down but initially there will be a pick-up in NIMs for sure.

You made it pretty clear that the credit growth upcycle is here to stay and it is not temporary. You are seeing a capex war of sorts among the corporates. What about the retail loan book? Is sentiment impacted in personal loans, car loans and home loans?

On the retail side so far we have not seen any impact. Let us remember that the rate hikes are just about a month old. They started in May and then again in June. This will take some time to settle in and for people to understand what the new EMIs are going to be. Also those hikes are still happening for a lot of banks as they are being done by the RBI. Therefore, over time, the impact of these hikes on their retail EMIs may lead to some rethink on consumption or taking of loans. It has not happened so far and in the case of MSMEs, the important thing is the timely availability of credit which is what they are most concerned about. Our sense on the ground is so far it has not impacted because it is pretty recent. Going forward, we will have to see what that does to the consumption kind of expenditure.


RBI has written a letter to fintechs and the conversation now seems to be that banks will come on top of fintechs. The free run that fintechs have had whether it is giving out loans, etc, is coming to an end. We are awaiting a digital lending guidelines framework from RBI. What does it mean for SBI and for YONO?

One thing is that we have been planning our own strategy and we do not necessarily get distracted by what the fintechs are doing or not. We have been looking to engage with fintechs for collaboration purposes in many areas including digital lending and YONO continues to go strong because so far we have been offering the loans on YONO to our own customers.

Initially it was ruled based and subsequently it has gone on to the machine learning models and that continues to show very strong growth. Therefore directly we were not so much impacted but our general view is that any entity which is lending in the system, which has customers at the other end, needs to be regulated in some form and shape. Therefore, what the RBI is doing if the fintech based lending becomes a significant part of the system or the growth which is shown becomes very strong and much more than what the system shows, clearly there is need for some regulation. They are now moving towards that direction and we welcome that.

We do not necessarily think that the banks are going to get disproportion advantage either ways. It has definitely led to some spike in

price but we do not normally comment on market movements. I do not think it will have too much impact on banks in general and us in particular.

Directionally, where is your ROA headed next?

We did achieve an ROA of 0.67% in March 2022 and our internal target is to take this up to somewhere around 0.8-0.85% thereabouts. Ultimately the aim is to reach 1 and as the NPL cycle has played out, our NPLs have come down sustainably over the last several quarters and therefore our provisioning requirement has come down.

Gradually that gap between our operating profit and the net profit has to merge and once that starts to happen, significantly the ROA will go up. In addition to that, since the rate hikes are now happening, we hope to see better NIMs that will also help us boost our interest income and therefore overall ROA. Our target is to ultimately to reach 1% in the medium term but in the short run in the next one year or thereabouts it is 0.8-0.85.

You have a 24- 25% market share. Where are you headed next and what will it take for you to grow beyond this number?

25% is a lot of market share and as of now, in the last three years, our deposit market share has stayed around 23% and we are comfortable with that number. We do not want to go down too much. If it goes up, that is good. Similarly on the loan side, it has gradually come down to around 20%. So our internal aim is also to stay around these numbers in both segments and to take it much beyond clearly means that we have to look at the quality of that growth also.

For example, in the loans while we are focussed on MSMEs and agri today, we are looking at newer streams of loans but we are also cognisant that the NIMs on each of these loans the returns they get should also be proportionate to where we want our ROA and our profitability numbers to be. Therefore, as a bank we are pretty comfortable if we stay around 20-23% in loans and deposits respective. In case we are able to leverage the new technology and the newer segments, if it goes beyond that, it is fine but we are comfortable with the current numbers as well.

SBI has gone on record and had said that they would be listing SBI MF soon. Will that soon will become very soon or will it remain soon looking at the market conditions?

Yes, the market conditions definitely are important for us because as we have made clear a number of times, the company does not need capital. This is a business which is not capital intensive. Between us and a joint venture partner, we have decided that the listing is important for the investor community to get a good name to invest in and also to get the kind of investors we want.

These would include some of the foreign investors as well. Now since the FPIs are not very bullish or taking out money, at the moment there will be some difficulty in getting the marquee names we want. So we are not in any hurry at all. We would wait for market conditions to stabilise and in my view till the war is on, till the rate hikes are still happening and not settled, market conditions will remain volatile. We are not looking at a very immediate thing. We are on record to say that we will do that but we will do that when the market settles down.

The historical challenge has been managing the cost to income ratio. When will we see a big improvement?

On the cost side, we have some rigidities, our workforce whose pension bill, salary bill continues to grow because of life expectancy going up. The yields were coming down, now of course the yields are going up. We will see some improvement in terms of the investment which back up that pension fund. Therefore that rigidity is something we really cannot do much about.

We are focused on two things; one is the income side. The other thing is that we have applied to the RBI for opening and operations support subsidiary and hopefully as that comes into being, much of the low value work which is today done by our own people could be given to this subsidiary and hopefully in the medium term, that will help us reduce some costs. That is how we are looking at the cost to income ratio, the immediate focus is on the income side.


When interest rate cycles start, NIMs will be higher because deposits are getting re-priced with a lag but treasury portfolios will also take a hit. So will the uptick in NIMs be nullified with the treasury loss?

Yes, so treasury initially, at least in this quarter, will see some impact because we do have a large AFS book, overall we did have a lot of deposit growth and therefore since the lending opportunities were relatively less in the last two years, much of that has gone to the treasury.

A significant part of that is held to maturity where this impact is not there but still there are lots of books sitting in the AFS category and that will be impacted initially. So the impact which the mark to market has on the AFS book with the NIMs, could see some balancing out. But remember these two come in different areas and so the net interest income comes directly from the advances, loans etc. Obviously that is not going to be impacted, it is going to see a pickup.

The mark to markets part will get impacted and over time, what will happen is because our modified duration is about two as it is quite a short duration book which we hold and as we go forward, the 10-years and the various government securities’ yields will go up and we will invest in the new high yielding scrips. That over time will lead to a pickup in the interest income. It will settle down over a period of time but first quarter sure there will be an impact.

Where is the liquidity picture headed according to you? Will the natural growth of credit ensure that the excess liquidity gets absorbed automatically?

If you look at the liquidity picture which RBI publishes from time to time, liquidity is already coming down. The last number I tracked day before yesterday was below Rs 2 lakh crore (Rs 2 trillion). Therefore from a high of more than Rs 5 lakh crore and even beyond, it has come down significantly and there are some reasons for it.

One is of course the CRR hike which absorbed Rs 87,000 crore. Then the market operations which RBI does to support the rupee from time to time, have been also absorbing some of it. So a mix of these factors has already seen liquidity come down and the loan growth which is happening since the last quarter is also responsible.

As we go forward with the loan growth picking up strongly, liquidity is coming down and therefore RBI is on record to say that while they will control inflation, they will also support liquidity and so we might see some action on that front also. What is the comfort number for RBI for a country our size? I am not very sure. Maybe it is around Rs 1.5 lakh crores or Rs 2 lakh crore. We are getting there. The liquidity has been coming down in the system and as loan growth goes forward, liquidity will come down further. We will settle at some spot where RBI will be comfortable and the banks themselves will be.