In wait and watch mode for return of demand and growth of capex: Praveen Gupta, SBI

ET Now in a chat with Mythili Bhusnurmath, Consulting Editor, and Praveen Gupta, SBI, discuss Rajan’s last credit policy and RBI Bi-Monthly credit policy and how 5% inflation target can be achieved by March 2017. Edited excerpts


ET Now: No change as expected but a hawkish stance on inflation from Raghuram Rajan. Your thoughts...

Mythili Bhusnurmath: It was as expected because he is known to be an inflation hawk and certainly there are signs that inflation is going to become a source of worry so entirely on expected lines and the hawkish tone on inflation is welcome and warranted.

ET Now: Anything else that stands out for you because frankly I am just looking at CRR unchanged, no changes on the REPO front just this uptick or the commentary. Do you think the market will be too perturbed by or as these comments are from an outgoing governor, we will have a new man at the helm soon and may be the market want his outlooks with regards to CPI with much more interest now?

Mythili Bhusnurmath: I would think so because markets are quite merciless. They are always looking ahead and now I think they will be looking at Rajan’s successor and see what does he have in mind. Yes the present governor was known to be an inflation hawk. I think, markets, given the way they function are always forward looking and now they would be eager to see who is the next man who steps into his rather big shoes and see whether he shares that same hawkish view of inflation or not because that is what markets would be focused on.

ET Now: A quick initial reaction from you?

Mythili Bhusnurmath: Well yes a very balanced I think press conference and the governor has held on to what his beliefs were and he has reiterated his faith in inflation targeting. The fact that it has brought down inflation is not to be scoffed at. What is really interesting is I thought both in the policy as well as in post policy remarks, he talks about inflation mind you the non-food inflation likely to edge up and he also talks about green shoots in manufacturing given these two I would venture to say that may be a governor’s six ago the same governor might have thought there is a case for hiking rates whereas the present governor thinks not so let us wait and see what happens in that with the successor whether he continues to hold that belief because if in fact non-food inflation is edging up then what is the government and the governor to do that remains a big question mark.

ET Now: No surprises out there, just that the outgoing governor has reiterated upward risk to 5% inflation CPI target.

Praveen Gupta: Yes I think it is more or less on expected lines. People did expect him to say something on the inflation, so I think earlier in the commentary, we do expect the inflation will calm down by March. Actually once the full impact of all the good monsoons come in, the vegetable prices will go down, I think the worry on account of the Seventh Pay Commission is definitely there. I think GST again probably is still sometimes away but we do expect around 5% we should be able to achieve by March 17.

Mythili Bhusnurmath: Do you see any prospect whatsoever of corporates returning to bank credit, trying to take more bank loans in the hope of investing? Do you see any signs at all of that or did you talk about low corporate demand for bank credit but looking ahead if you could read the tea leaves, does the prospect of GST being on the cards raise the prospect of corporates returning and investing once again?

Praveen Gupta: See GST would definitely be positive as far as the investments are concerned. But I think at this point of time, there are lots of corporates dealing with the stress they are already feeling. On top of it, we have excess capacity in the system also. It is a question of demand coming into the system. We have seen inquiries from the customers but it has not really resulted into any large capex happening at this point of time.

I think the existing capacities need to get utilised first actually, plus we are going to see a very muted increase in demand. Typically, the second half of the year is the busy season for the banks. We do see credit demand picking up. We have been seeing good demand coming from the retail segment, from the personal side, services sector also there has been demand but I think we really need to still wait and see the real corporate demand from the manufacturing sector to come in. Hopefully GST could be the trigger which could lead to some of that demand coming in but we still need to wait and watch for that.


ET Now: Your initial thoughts – liquidity, GDP targets retained, FCNR (B) not an issue, NPA fears, I thought he mentioned that NPA fears there was not enough, there was not alarm bells being sounded with regards to the NPAs that kind of stood out from a banking perspective for me.

Praveen Gupta: You are talking of say MCLR rates actually. Basically, I think banks are being unfairly blamed for not passing on the lower interest rate benefits. If you look at the bank balance sheet, only about 1% of borrowings are from the market or from the RBI related rates actually. Bulk of our funds are basically the deposits that we raise actually and there is definitely a transmission delay, the cost of (3:51) for the banks have to come down before the banks can actually start passing on those benefits. And the second I think the very important factor which we tend to miss at times is that about 40% of the bank’s liabilities are CASA deposits and CASA deposits as we know are basically interest rate agonistic. The interest rate changes do not really have any impact on that.

So the RBI did bring in the MCLR the new regime which led to almost 20 bps reduction from the existing base rate scenario. Now the MCLR the way it works is it is formula driven rate actually. Whatever rates that we offer on our deposits and that lead to a calculation and which the banks arrive at the MCLR and every month this rate is being reworked and there has been slight gradual reduction that will happen. As I said earlier, so once now that the liquidity (4:41) becomes good actually and the banks are able to reduce their deposit rate further so that will automatically lead to a transmission by way of a lower MCLR. I do not really see much of a problem happening there. But now that we are actually bound by a formula which determines the rate, there is no decision which is taken by anybody on how to fix the MCLR. So unless we are able to reduce the deposit rates, there is no way the banks can reduce their MCLRs.

Mythili Bhusnurmath: The formula driven MCLR. Is that the way to go a uniform industry wide formula driven MCLR or should it be left to banks to decide their own MCLRs and leave it to competition to ensure that you get a fair bid as far as the consumer is concerned?

Praveen Gupta: Absolutely. I agree with you. I think the formula unnecessarily binds the hands of the banks also. I think the governor Rajan also mentioned in one of the interviews that MCLR is only a transitory mechanism. Ultimately, it should be the competition which should be driving it. I guess sooner we move to a system like that, it is better because in that case the banks do get much more flexibility. Right now, even if we want to reduce our lending rates, we cannot do it because we are bound by the formula. So I guess ultimately the completion should drive what the banks deposit and the lending rates should be, the banks have full flexibility on the deposit side. I guess on the lending side also the same flexibility should come in.


Mythili Bhusnurmath: As far as the State Bank of India is concerned, the governor talks about seeing green shoots in the manufacturing sector. Are you seeing any corroboratory evidence as far as loan offtake is concerned? Where is the RBI seeing these green shoots? Are they getting reflected in the credit offtake of banks?

Praveen Gupta: Pick up actually, so some of it is happening in terms of better capacity utilisation and some of the stressed sectors where some projects were stuck, actually some of them have got going actually. So those are the kind of things that we are seeing actually, not really, like ultimately for us to look at the credit demand coming in, we would like to see some huge capex happening actually in new projects. I think practically nothing on the new projects actually. Even in the existing projects, I do not really see too much of capacity expansions happening actually. But generally if you look at the numbers that have been reported so far, we have seen much better numbers in terms of overall realisations. The turnovers are moving up a little bit. It is more coming from better capacity utilisation rather than in terms of the fresh capex. I think this is still maybe one or two quarters away.