Dinesh Kumar KharaPresident, SBIsays “deposit in the economy is a function of the total liquidity in the system, which is one part of the story. The other part is that if it’s not in the banking system, it’s either in mutual funds or life insurance. So the fact remains that these deposits are channeled into the economic activities either through the banking system or through the markets that remains a fact Fiscal consolidation and the kind of tax numbers under GST etc bodes very well because eventually it should show up in sovereign valuation . Eventually an improvement in sovereign valuation will also help attract global investment into the economy.”
The expression on your face tells me that we are in for some surprises tomorrow.
Dinesh Kumar Khara: I think we’ll have to wait until tomorrow morning to know what’s in the numbers.
The Budget numbers, Mr. Khara, are impressive. The fiscal deficit number is quite impressive and one would say that this is a budget that only instills a lot of confidence in the government’s outlook for economic growth.
Dinesh Kumar Khara: You are right, absolutely. I think the way this Budget came in with the kind of focus on fiscal consolidation and also the kind of focus on growth and that too led by infrastructure. Also the newer focus that has come for solarization as well as for housing for the middle class and also in the rural sector, a special push in these areas actually bodes very well in terms of the growth potential it holds for the economy. And the way it will really develop in the economy and various economic sectors will definitely be very positive for the overall growth for India.
Could the fact that the commitment to capex has gone down – because of the base effect and because of the government’s commitment to fiscal deficit, have an indirect effect on the economy and especially on the infrastructure sector?
Dinesh Kumar Khara: I expect that normally this kind of government spending on infrastructure will definitely have the multiplier effect and I expect the private sector to come in now as well. So it will be a combination of efforts by the government and the private sector and then reflect the growth of the economy.
May I assume that this is also an indirect message from the government and you are in a better position to perhaps give us the ground reality that in India finally that private sector nivesh ka mahakumbh, has started?
Dinesh Kumar Khara: Yes, of course. The private sector investment is a function of their confidence in the growth potential and I think that supporting the infrastructure, keeping the fiscal deficit under control is a very clear reflection in terms of making sure that the economy is healthy and if at all the economy remains healthy and this. kind of fiscal numbers will actually give confidence to the international rating agencies, which will also lead to an improvement in the rating for the economy as a whole. So all this will move towards the lower interest rate trajectory which will ultimately be for the ultimate good for the Indian economy and the Indian industry.
Looking at the way the entire banking sector is currently moving, the accountability war is still going on. If I use the private banking numbers for benchmarking, it looks like banks are going to have to shell out that extra, they’re going to have to walk that extra mile to get deposits now. Do you think that the concern about receiving deposits and especially low cost deposits is a real concern and it is here to stay?
Dinesh Kumar Khara: Indeed, deposit in the economy is a function of the general liquidity in the system, which is one part of the story. The other part is that if it’s not in the banking system, it’s either in mutual funds or life insurance. So the fact remains that these deposits are channeled into the economic activities either through the banking system or through the markets which remains a fact.
So eventually to support the higher economic activity in the economy, the need is to channel the savings into investments. The other piece is that if at all the fiscal is like this, inclusion of the common debt paper in the global index will also attract foreign capital into the economy. So that will also be the additional source that will increase the loanable resources or the economic resources to support the growth in this economy. So the fiscal consolidation and the kind of tax numbers in terms of GST etc augur very well because eventually it should show up in a sovereign valuation. Eventually an improvement in sovereign valuation will also help attract global investment into the economy.
The fact is that the fiscal deficit will come down, India will be part of the global index soon. The flow into bond markets would be extremely strong, which means it will have a short-term impact on yields. Are we ready for a regime where we could be in big fiscal gains and a huge increase in yields and that is positive for the banking sector?
Dinesh Kumar Khara: Yes, I would say that I expect the same for it to be positive for the banking sector. And yields have already started to go to the downside. And also the lower government borrowing of the system will also leave room for, it will actually create space for the private sector to also borrow. I think all these are factors that eventually indicate that there is ample opportunity and there is also ample scope to take the economy to the next level. I think we would very soon be a $4 trillion economy in FY2025. And becoming $5 trillion in FY2027-28 is almost certain at this rate.
A concern that some of your colleagues have pointed out is that India’s savings rates are falling, money is moving into financial markets, while banks are happy that they are getting a lot of fee-based income by selling mutual funds and opening brokerage accounts, that. comes at the expense of SA, which has an impact on the cost of responsibility. Is this a sector-wide and real concern?
Dinesh Kumar Khara: No, I would say that banks are always the channels through which money moves, either into investments or into deposits in the banking system. See, in terms of channeling the money, everything will happen through the banking system. So I think eventually, and that is something that helps the system as a whole to grow and also support the other sub-segments or the financial sector to grow as well.
Is there a concern about this drop in savings? Is it the fact that money is moving into capital markets, stocks, shares and mutual funds? Isn’t that a concern?
Dinesh Kumar Khara: To my mind, it seems to be a temporary cause for concern, but eventually, in the general context, money stays within the economy, to support economic activity. So far it is so, it will only lead to an expansion of the pie, and that expanded pie will also create opportunities for the banking system to support its deposits.
You mentioned that India will move from $4 trillion to $5 trillion to $10 trillion in the coming years. It is about 5, 6 or 7 years. Where do you see a huge boom in credit? Which sector do you think will give that boost to India and foreign bankers and for a bank which is the next growth frontier, where do you want to lend?
Dinesh Kumar Khara: I would say that maybe there is an opportunity for all sectors to see the kind of growth in India and also be it rural, be it SME, be it corporate, be it retail. I think there is an opportunity for all sectors to grow and maybe almost at a uniform pace as well.
When we started the year, the GDP growth estimate was around 6.5%, that RBI number has now gone to 7% plus, which means we are surprised. You have always said that the SBI growth would be a function of the real GDP growth plus the nominal GDP growth plus 2%. So if I do the math here, what’s your initial estimate at the beginning of the year, what’s the nominal GDP and what’s your formula, it looks like we’re surprised.
Dinesh Kumar Khara: Let’s see how it really happens. What I mentioned was the formula, which I believe is the nominal GDP plus inflation rate, something that is the likely determining factor for the loan book to grow.
The Reserve Bank of India has raised a red flag, at least on the unsecured loans, and SBI has a large exposure to the retail book. What is your understanding of the risk that currently exists, at least in the unsecured/retail category?
Dinesh Kumar Khara: As for us, in State Bank of India, I have also said in the past and we will repeat, for us regarding the quality of the unsecured, it may be better than the secured, that is one .
Secondly, our unsecured is not actually unsecured, because we lend only to those people who keep their salary account, where we have a very clear visibility in terms of the cash flows. So that’s something that’s led to a situation where the book that we have is very different in character compared to maybe the rest of the industry. But I would also like to mention that maybe the RBI wanted to encourage growth, but they always wanted it to be healthy growth.
In the case of retail, healthy growth means that the entity or the bank concerned should have elaborate structures to assess the risk, underwrite it, and they must also have an efficient collection machinery so that the book remains intact. Because in the case of retail, very often we have seen that there is a trend. If at all it gets bad, it gets very sticky. So that is the reason why RBI has taken certain measures which ensure that industry should witness a healthy growth in retail credit.