Soaring inflation, rising interest rates, money outflows from the REIT and the depreciation of the Rupee have emerged as concerns for the Indian economy lately. While these factors are seen as challenges to the economy, State Bank of India Chairman Dinesh Kumar Khara told George Mathew and Sandeep Singh that strong GST collections, demand in the economy, growth exports and slowing inflation are some of the bright spots. , and in the third quarter, things should start to improve. He added that an artificial intervention for the rupee had no long-term impact. Edited excerpts:
Do you see concerns for the economy among the various challenges that currently exist?
Considering the situation, things are looking pretty good. GST is 1.4 trillion rupees, inflation is down and now stands at around 7%, exports are increasing despite what is happening in the world. I think those are some of the positives that I see in the economy. And, if you really ask me, the major challenge is basically because of fuel prices due to geopolitical disruption. I think these indicators very clearly reflect that if the fuel is under control, the economy has the potential to grow nicely again. Nevertheless, our growth is already 7 or 7.5%. I think if we look at the major economies of the world, maybe economies of this size, we seem to be doing well. And even on the currency, which is another cause for concern, it was holding up pretty well against the strengthening dollar index. Many other currencies have weakened significantly. We hope that by the third quarter things should start to improve further.
The rupee is hovering around 80 against the dollar. Do you think RBI should step in? Also, will the recent measures to boost inflows help?
I think that (the intervention) really doesn’t work. Compared to that, I would say that if the trade balance is in our favor, maybe it will work out better. Thus, artificial intervention does not really have a long-term impact, it can only be a temporary impact. Already many of our foreign exchange reserves have disappeared. From around $600 billion and up, we are now at $580 billion.
The FCNR (depository system) is a very rate sensitive product. And, we observe that in different markets, interest rates are on the rise. But, normally it happens that when it comes to the NRE rupee, normally the flows go up whenever the rupee weakens. And it is also a repatriable account. The type of relief that the RBI has provided, it is perhaps basically for the FCNR(B) scheme. We also raised the interest rate on July 10. It is too early to truly assess the likely impact. We have to wait and watch.
How do you see inflation? How big is the concern because of the Russian-Ukrainian war?
The way it has evolved, from 7.9% inflation has already come down to 7% and maybe towards the end of the third quarter or the beginning of the fourth quarter we should have inflation of 5% and the ‘excess liquidity in the system also came down. The global crude price and supply chain disruptions, which occurred during Covid, are addressed in a timely manner.
Even though war presents risks, there are several things. The first, of course, is that this is a US Federal Reserve-induced recession in the United States. Also, I think China is still not on the growth path. Both of these factors will impact global food prices and keep crude prices in check.
How do you see the credit drawdown?
We haven’t seen demand decline and the retail engine has been growing at around 14-15% CAGR for almost four years. We expect to see a similar type of growth. The company’s performance has also started to improve compared to the last quarter ended March 2022. There may be a slight bump here and there, but, overall, I expect even the company’s portfolio increases. Last year, our international group grew by approximately 15%. We expect similar growth in the international book. As far as we are concerned, we have sufficient margin in terms of availability to support credit growth. Of course, at the system level, deposit growth is lower than credit growth.
What is driving credit growth? Which sectors should drive demand for credit?
Part of the credit growth is due to working capital, as capacity utilization improved to 75% for the economy from around 69%. Supply chain disruptions, when addressed, lead to improved capacity utilization. High-touch sectors like tourism and aviation, which have actually suffered, seem to be coming back.
Renewable energies have enormous potential. PLI, of course, is the other area of interest. Then the focus on infrastructure in terms of new airports that are coming and new ports that have been sanctioned. The infrastructure itself, including roads, is one of the main areas of growth.
Given inflation levels, do you see any further rate hikes by the RBI?
I think those decisions will depend on several variables, which they assess when the MPC meets. I think it’s hard to really guess right now.
Although there are concerns about inflation, growth and the rupee, how are international investors looking at India?
They are all watching India with great interest. But, yeah, maybe they will wait and watch because a lot of them, especially when it comes to FDI, invariably come with a very long-term perspective. Some of the long-only investors are watching the country with great interest for the simple reason of political stability and also how accepted a country has been globally in the recent past. I think those are some of the reassuring factors that these investors are looking at.
What is the status of bad debts?
I won’t say stress but yes, volatility is seen in metals. We will have to wait and watch due to the global commodity problem. I think overall the picture looks better. But the sub-segments, of course, are very different. As far as SMEs are concerned, there could be (slippages). Overall, I don’t expect the picture to be bad. And anyway, whatever the probable stress of the restructured accounts, we had made the provisioning to insulate the balance sheet from the future shock. So that will also reassure us but nevertheless, in SMEs, where cash flow disruptions are not repaired, there can be stress. But I think we’ve done enough of that already. The detail segment is usually correct.
Do you see concern about the NPA across all segments?
I’m not expecting much… On the corporate side as well, we don’t have any problems and we were provisioning aggressively. Similarly, the SME stress book also supported us. We manage a book of nearly Rs 28 trillion. So little things here and there will happen. It is a function of economics.
Also in the ECLGS book genre, aggressive provisioning is done. Our overall supply was around Rs 7,000 crore. Our ECLGS pound was around Rs 20,000 crore. Of the Rs 20,000 crore, about 50% was in retail, which has sector-based home loans and mortgages and a further 50% was in the SME sector. When it comes to a home mortgage portfolio, nearly 75% are for first-time borrowers. It is therefore not a request for investment, it is rather a necessity. And they’re also very aware that if they default, their credit score takes a hit.
Don’t you think there has been a slow withdrawal of the bad banks?
We have all approvals, and even non-binding offers have been made by them. And now the fact is that it is a process. Resolving stressed assets is always a process. Once the non-binding offers are given, each bank will evaluate and then come back. It is a process that must be completed. They already do. And I think they have accounts that have already been transferred to them. They are in the process of certifying their assessment – the floor price assessment – so that they can provide non-binding offers to participants. I think they have already started working. Maybe soon we will see the results. Accounts of around Rs 50,000 crore were transferred in the first tranche.
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How do you see the tightening of regulations on NBFCs?
They are now becoming critical overall. NBFCs are the last connected mile. So, of course, to bring discipline to the industry, it is very essential that all sub-segments of the industry are well regulated. By the way, there is arbitration, regulatory arbitration.
How do you see the growth of fintechs and do they pose a threat to banks?
Certainly not. The bank not only accepts deposits and offers funds transfer services. Banking is a more complex subject and the basis of lending also involves a lot of decision making. I think they only offer solutions that can be consumed by banks. It is therefore impossible to expect them to take up the space of the bank. They are not subject to regulation, first of all. The financial industry across the world is a very tightly regulated industry because it ends up operating with other people’s money. I’m just saying it’s (fintech) a very different business. There may be an opportunity for collaboration. They may not be able to substitute for banks.