Credit Growth Will Drive Liquidity Normalization: Dinesh Kumar Khara, Chairman, State Bank of India

Credit demand will cause excess liquidity to be deployed in the form of loans in the normal course and there may be no further increase in the cash reserve ratio (CRR), said the president of the State Bank of India (SBI), Dinesh Kumar Khara, to Shritama Bose. The country’s largest lender will bring its Yono app to customers across all banks, with payments and analytics playing a major role in the process, he added. Edited excerpts:

How do you see the evolution of interest rates at this stage of the cycle?

It has a direct correlation to the inflation figures coming in, as well as policy announcements from the Reserve Bank of India. The inflation figure fell from 7.79% to 7.04%. This essentially reflects fiscal policy and monetary policy combined. The measures taken by the government in terms of reducing taxes on petrol and diesel and import duties on edible oils have played a role in reducing the inflation figure. As it stands, if inflation is under control and below 6%, I expect this interest rate cycle to follow a completely different path.

Term deposit rates have risen, but could we see savings rates rise?

Deposit rates started a while ago, but mostly from an ALM perspective. Lately, the trend we see is that the loan portfolio is growing faster for the whole system, compared to the deposit portfolio. Also, since inflation is higher, where possible, we pass the profit on to depositors. On savings rates, we’ll have to take a call when the time is right. From now on, since the ALM suggests that we increase the rates in certain bands, we have done so. I don’t think savings rates will change.

Is the industry concerned about the pace of liquidity normalization?

Rs 87,000 crore rise in CRR resulted in a liquidity drain of Rs 87,000 crore. At one point, the system had a liquidity surplus of almost 5.35 trillion rupees, from where it went down to around 3.3 to 3.4 trillion rupees. For a system of this size, excess liquidity on the order of 1.5 trillion rupees is a very welcome figure. I don’t expect any further CRR hikes because the way loan growth has started to happen, the excess liquidity in the system will unfold into loan growth.

How do you see business loan growth for the rest of the year?

Loan growth is directly linked to capacity utilization, which has already increased to 74.5%. With improved capacity utilization, working capital limits are set for better utilization. What we normally see is that as capacity utilization approaches 85%, investment picks up. In some sectors, we have seen capacity building and new investment proposals. Government initiatives such as the National Monetization Pipeline, National Infrastructure Pipeline, Gati Shakti and PLI are facilitating new investments, and we expect to see traction under these programs in the current year. We have seen growth in airports, ports, steel and renewable energy.

Do private banks also participate? What about pricing?

Some of them show interest. We normally try to underwrite and then sell lower, depending on the appetite of other banks. Regarding prices, at one point there were problems. But as the excess liquidity dries up, even the pricing power will revert to the banks. It has improved slightly so far.

Will higher rates affect demand or ability to repay retail customers or MSMEs?

In retail, we use the EMI to NMI (net monthly income) ratio. With rising inflation, monthly incomes have also increased. We are seeing wage increases to pre-Covid levels in the corporate sector. Even if the EMI increases, it will not increase as much. With regard to the leverage effect on the balance sheets of individuals, it is still largely likely to increase. As incomes and aspirations rise, the retail engine should continue to do well. On MSMEs, of course, there might be some pressure. But if they have the ability to pass on interest rate increases, they may not face stress. So far, we haven’t seen any major issues.

How are you preparing Yono for the era of digital banking?

Yono is already a digital bank within the bank. Until now, it was for our existing customers at the bank. We are also trying to attract new bank customers, initially through the payment mechanism. Afterwards, we can offer them our wide range of services. Yono 1.0 has had good traction. We have started to take advantage of the analysis lever and with it, we personalize our offers. All this will be rolled out with Yono 2.0 which is for all Indians. We have already hired a DMD for digital market technology and he is helping us with that.