Credit growth will drive liquidity normalization: Dinesh Kumar Khara, Chairman, State Bank of India

Demand for credit will lead to excess liquidity normally being used as loans and there may not be any further increases in the cash reserve ratio (CRR), Dinesh Kumar Khara, chairman of the State Bank of India (SBI), told Shritama Bose. The country’s largest lender will bring its Yono app to customers of all banks, with payments and analytics playing a key role in the process, he added. Edited excerpts:

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

It has a direct correlation with the inflation numbers coming in, as well as with the policy announcements of the Reserve Bank of India. The inflation rate has fallen from 7.79% to 7.04%. That is essentially a reflection of fiscal and monetary policy together. The measures taken by the government to lower taxes on petrol and diesel and import duties on edible oil have played a role in curbing the inflation rate. As things stand now, I expect that if inflation is tamed and moves within 6%, this interest rate cycle will take a very different trajectory.

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

The deposit rate once started back, but essentially from the ALM point of view. Lately, the trend we observe is that the lending portfolio is growing faster for the system as a whole, compared to the deposit portfolio. Because inflation is on the high side, we also pass on the advantage to savers. As far as the savings rate is concerned, we must call on time. As of now, since the ALM suggests that we increase rates in brackets, we have done so. I don’t think the savings rate will change.

Is the sector concerned about the pace of liquidity normalization?

The 50bp CRR increase resulted in a liquidity depletion amounting to Rs 87,000 crore. At one point, the system had excess liquidity of nearly Rs 5.35 trillion from where it has fallen to around Rs 3.3-3.4 trillion. For a system of this size, excess liquidity worth Rs 1.5 trillion is a very well received figure. I don’t expect any further CRR increases because the way credit growth has started, the excess liquidity in the system will be leveraged into credit growth.

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

The credit growth is directly linked to the occupancy rate, which has already moved up to 74.5%. With the improved utilization rate, working capital limits are set to see better utilization. What we normally see is that when the occupancy rate rises towards 85%, investment picks up. In some sectors we have seen capacity building and new investment proposals coming in. Government initiatives such as the National Monetization Pipeline, National Infrastructure Pipeline, Gati Shakti and PLI are conducive to new investment, and we expect these programs to gain traction this year. We have seen growth in airports, ports, iron and steel and renewable energy.

Are private banks also participating? What about the pricing?

Some of them show interest. Normally we try to insure and then sell depending on the interest of other banks. At one point, there were pricing issues. But as the excess liquidity dries up, even the pricing power returns to the banks. It has improved marginally so far.

Will higher rates affect the ability to repay retail or SME customers?

In retail, we use the EMI-to-NMI (Net Monthly Income) ratio. With rising inflation, monthly incomes have also risen. We’re seeing pre-Covid pay rises in business. Even if the EMI rises, it won’t rise that much. In terms of leverage on individuals’ balance sheets, there is still plenty of room to increase it. As incomes and aspirations soar, the retail engine should continue to thrive. There can of course be some pressure on small and medium-sized enterprises. But if they have the ability to pass on the rate hikes, they may not have to deal with stress. So far we haven’t seen any major problems.

How do you prepare Yono for an era of digital banking?

Yono is already a digital bank within the bank. Until now, it was for our existing-to-bank customers. We are also trying to bring in new customers, initially through the payment mechanism. We can then offer them our wide range of services. Yono 1.0 has seen good traction. We have started leveraging the analysis lever and are adapting our offering accordingly. All of that will be rolled out with Yono 2.0 which is intended for every Indian. We have already taken out a DMD for digital technology and he is helping us with that.

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