The Reserve Bank of India’s decision to ban Letters of Undertaking (LoUs) will raise costs for importers and will hurt export competitiveness, says SBI chairman Rajnish Kumar, in an exclusive interview. Edited excerpts:
What will be the impact of RBI’s ban on Letters of Undertaking (LoU)?
The cost of imports will go up. What was happening was importers, through the route of LoU, they were availing dollar funding which was cheaper than rupee funding. So now, the importer will have an option of either opening a letter of credit, but for that they will need suppliers’ agreement — the supplier should be willing to extend the credit. Or otherwise, they have to fund it through rupee borrowing. So, that will increase the cost. And if they are exporting, then it will impact your export competitiveness also.
PNB had said it will pay the bonafide dues to the banks. When are you expecting payments from PNB?
We have given our claim and all the supporting documents. Hopefully some repayment will happen this month.
What has been the response from the banking regulator for improving checks and balances after the PNB scam?
RBI has asked all the banks to integrate SWIFT with the core banking solution.
All banks are now linking SWIFT with CBS.
RBI has given a circular to do it by April 30. We will do it by that time.
What are the steps SBI has taken?
We thoroughly reviewed our LoU portfolio. Risk management in the bank is a continuous process and not a one-day process. Period review, see to it that checks and balances are working, you have to on a continuous basis.
RBI came out with a circular tightening NPA norms. What is your view?
There are two ways to look at it. One is there are definitely bring more discipline on the borrowing. Borrowers will be more careful on how they manage their cash flow and the intent will be to repay bank dues in time. However, on certain things probably some relief is required. The Indian Banks’ Association has represented to RBI on these issues. So let RBI examine it and see what comes out.
What are the issues?
One of the things that the circular says is that before an account is upgraded, 20% has to be paid. I think that is a bit tough requirement. Similarly, if the account is under restructuring and even if there is a delay of one day and then the account has to be referred to NCLT within 15 days.
But on the whole, I think this is a step in the right direction. But there are certain things some relaxation is warranted keeping in mind the dynamics of business. Because, at times, it happens that cash flow is temporarily disrupted, which is normal in business. Getting worried immediately because of this is not warranted. If it is persistent problem that if someone is unable to pay on a regular basis, then definitely lenders need to look at it for early resolution.
Apart from this circular, bond yields have further increased in Q4. How difficult is Q4 going to be?
It is going to be difficult for banks on account of both these reasons. But thereafter, things will start returning to normal. By April-May, all the NCLT cases of the first RBI list will have resolution. The impact will be that banks’ gross and net NPAs will start coming down. And certain portion of these assets will get a new management, so that will start become performing. You normally see a negative credit growth in first quarter, but I have a feeling that credit growth will be positive in first quarter.
For SBI, our pipeline of stressed assets looks very normal. Our fresh slippages in the next financial year will not exceed 2%.
So, do you see credit demand to pick up in the next financial year?
There are certain sectors which are doing well. Like if infrastructure grows, then naturally cement will do well.
In steel sector we have seen revival. I am told, housing sector demand is much better starting from January.
Automobile sector is doing well. There are many sectors where activity is happening, but what is probably missing is large size projects by the private sector which is because of the over capacity that has been created. Going ahead, we see revival in credit growth.
Also, now NCLT resolution will start happening. In many cases, we are at advanced stages of resolution. If that starts happening, then there will be working capital, investment requirements will revive demand.
When do you expect this to happen?
We expect this credit revival in one quarter. Normally, the first quarter of the current financial year is subdued in terms of loan growth, but I am expecting good activity in Q1 because of the resolution.
After taking charge as SBI chairman last year, you talked about taking stock and correct course where necessary.. What are the areas that you have identified?
A couple of things have been initiated. Out portfolio strategy has been reworked. April onwards, our budgeting will be risk based . Capital allocation between various business groups, more emphasis on profitability, revamped organizational structure for corporate banking group, a revamped organizational structure for stressed asset group, and roadmap for IT and digitisation will be unveiled from April 1.
SBI decided to reduce the fine for not maintaining minimum balance. What was the reason?
In our country, people are very sensitive about charges, whether it is banking service or railway ticket. As a bank, we have to take into account customer sentiment. So, there was a demand. We had said we will take into account the demand of the customers, and in response to their demand, this step has been taken.
Banks including SBI have increased interest rates recently. Do you think rates could go up further?
All banks have recently increased their MCLR by 15-20 bps. Interest in the market is also stabilising. Further hardening of rates may not happen.
