‘We made sure our drawing standards are robust’
When the competition undercut the State Bank of India on home loan interest rates during the last festival season, it surprised the banking ecosystem why the bank did not respond to the bold move.
Dinesh Kumar Khara, Chairman of SBI, has a pragmatic answer. He doesn’t want to be an opportunist, but instead wants to offer a long-term home loan at 6.70 percent interest, he says.
In an interaction with Business line, the head of India’s largest bank, which had a total business of 63.40 lakh crore at the end of September 2021, spoke, among other things, about why some companies are switching to fixed-rate loans and how SBI’s balance sheet has been hedged against possible slip-ups in the banking sector, among other things. Excerpts:
Why didn’t you run the gauntlet when your competitors undercut you on mortgage rates?
Your offer is for a very short time. I don’t want to be opportunistic. I would love to offer a long-term home loan with an interest rate of 6.70 percent. My view is that the borrower will answer a call depending on the interest rate. I don’t want people to take a phone call with the illusion that this is the interest rate, especially if it is a long term borrowing. We were the first bank to cut interest rates on home loans (from 6.80 percent to 6.70 percent in September 2021).
We have now linked this interest rate to the Schufa scores. The interest rate is linked to the risk quality of the borrower. It was a very conscious call from us.
In addition, we need to take all stakeholders into account when setting lending rates. We need to make sure that we are creating an adequate amount of money for the stakeholders who have given us the capital to lend. We don’t want to short-circuit anyone in favor of another stakeholder. I believe that if we can ensure on-time delivery, we will have enough market and even grow well at a rate of 6.70 percent.
All banks are too focused on retail loan growth. Isn’t there a risk of a bubble developing?
Retail lending has grown well. Our CAGR for the past three years is 16 percent for retail loans. And if we go (backwards) a little more, maybe five years, then in my opinion it will be around 24 percent. It seems to have been even more pronounced in the recent past, as corporate lending has not grown with it. Bubbles sometimes, if ever, arise when underwriting is not up to par or when banks are unaware of the risks associated with such type of underwriting. The second reason, if any, that a bubble forms is because people take out loans that are beyond their repayment capacity.
In the current situation, we are writing private customer loans to our existing customers who have a very clean track record. And it is they who keep their payroll accounts with us – most of them when it comes to unsecured loans. For our home loans, a segment in which we are the largest provider in the country, we take into account the Schufa ratings / scores, in this way we have ensured that our underwriting standards are robust. We have strong underwriting principles that help us build a healthy portfolio. We have the collecting machines on site. We have strengthened this machine park as we are making it big in retail. We have shielded the bank’s balance sheet from the potential risk of any kind of bubble.
Their RAM (retail, agriculture, and MSME) portfolio is now 65 percent, with the remainder being corporate loans. Is this an ideal loan portfolio mix?
In my opinion, an ideal portfolio mix that a bank can handle well … And as long as our current loan portfolio continues to generate interest income … I think we are in a safe zone in the mix.
Why do borrowers, India Inc especially, gravitate towards Fixed Rate Loans?
What usually happens is that, in terms of return behavior, we have seen that the short-term return is usually the one that dictates the long-term return curve. Most recently, the variable reverse repo rate is just under 4 percent. Perhaps the repo rate can change at some point.
And it also reflects the increased demand for credit. From my point of view, these are the trends that are being noticed by some companies that are eager to pay off their debts. That is why they opt for fixed rate loans.
Is there a risk that the accounts will be restructured within the framework of the RBI’s processing framework for Covid-19-related stress slips?
As for the slippages, we rated our book. Cash flows were disrupted in almost no time with the Covid outbreak. But the capacity to repair cash flows is also significantly strong. As the economy opens up, cash flows are restored. We saw that too. And the confirmation of this behavior can also be seen in the repayment behavior that we observed in the last quarter.
However, as far as our bank is concerned, we have now carried out a restructuring of about 30,000 crores, and the probability of default in normal course, looking at our data, was about 30 per cent. But I expect it will be much lower in this portfolio for the reasons just described.
And we provided the commissions (₹ 6,181 crore). And some of the loans that we have granted to such MSMEs are within the framework of the guaranteed emergency credit line, a first-loss guarantee system. So I think we have the potential risk from any further slippage or stress that could build that particular portfolio.
In the second quarter, SBI posted the highest net income at 7,627 billion. Can you keep up with this achievement?
I think there are a lot of variables when it comes to performance. In fact, the peak of these moving parts is the net result, which is reported quarterly. It is our aim to continuously improve our performance. Hopefully we should be able to do that.
What is your vision for SBI?
When I took office (in October 2020), I indicated that we were aiming for a return on investment of one and a return on equity of more than 15 percent. We achieved a RoA of 0.61 and a RoE of 13 percent plus. At the ROE, we’re within striking distance. In terms of RoA, I think we should be able to improve.