Mumbai, Nov 16: State Bank of India chairman Maya Shankar Verma created a stir in financial circles a fortnight before the announcement of the busy-season credit policy when he said that banks would not be able to bring down their lending rates further as that would affect their bottomlines.Be that as it may, State Bank was the first to go in for a lending rate cut immediately after the policy announcement. Again, Verma created a storm by announcing a new lending rate for term loans at 25 basis points lower than working-capital loans, a move that seemed to defy basic economics when the cost of raising long-term money is more expensive than short-term funds.In an interview, Verma outlines the bank's new business strategy. Excerpts:

In October, State Bank pared the credit growth target from 16 per cent to 13 per cent. Is there any further downward revision in the target? Has credit offtake finally started picking up?

No, there is no substantial improvement in credit offtake so far. Corporates with triple-A and double A+ ratings are resorting to instruments other than bank loans. There is liquidity in the system, and corporates are raising money at a cost much below the prime lending rate. They are raising money through commercial papers, non-convertible debentures and preference shares.

The larger corporates are adopting these routes to raise money. In fact, their outstandings in banks' books are coming down because they are converting some of their loans into these (instruments). The real credit offtake will be triggered by smaller units who would ordinarily be not in a position to raise money through these routes. But that is a comparatively slow process. I think we should be able to meet the revised target.

What is your gameplan to boost the advances portfolio?

We are aggressively going into trade- and housing-finance. Now is the time for agriculture loans to pick up as well. The focus is also on the small-scale industry; we are also concentrating on the transport sector.

Won't there be a clash with SBI Home finance if you aggressively enter housing-finance?

Their reach is limited. SBI Home Finance is based in Calcutta and has some branches here, but they do not have the reach like us. We plan to go to the housing-finance sector at a retail level. The plan is to disburse about Rs 200 crore housing loans this fiscal.

Since corporates want to access cheap money, will SBI's exposure to commercial paper and non-convertible debentures be higher than traditional loans this year?

It would be difficult to give the break-up. By the year-end, our growth through CPs and other instruments -- other than the loan books -- will be about Rs 4,500 crore roughly and the rest, about Rs 6,000 crore, will be through loans. In the first half, total asset growth has been about Rs 4,000 crore. Commercial paper, debentures and other instruments account for the major portion of this sum.

We have a compulsion to pick up commercial paper as our clients are moving out in search of cheaper loans. If we have to protect the movement of our clients, we will have to subscribe to their commercial paper.

The bank's spread must be under tremendous pressure. How do you plan to protect the bank's bottomline?

It's the trend worldwide. A certain segment of my loan book will be at a very fine rates because these are triple-A rated clients. But whatever I lose here, I will have to make up through increased turnover, which will take care of our profits. Our deposit growth has been robust, and we have not reduced our deposit rates substantially. Two months down the line, the credit growth will be much stronger than what it is now. As long as we get more working capital, which is deposits, it will be possible for us to increase volumes, and it is these volumes which will take care of the bottomline. The margins will definitely come down, you cannot stop it.

Will this development affect your growth prospects?

Not at all. We have to be prepared for this movement of the market. It is a worldwide phenomenon. We will have to increase our volumes to take care of our bottomlines. We will have to introduce new instruments and products to our clients. Those of us who can do it will be able to protect their bottomlines; those of us who cannot will suffer.This year, we will concentrate on cards, credit offtake and gold. If our plans in the trade sector succeed, there will be a substantial credit offtake. This is a segment which has not received the attention of commercial banks in a big way. And once this sector's requirements are met...there will be both loans as well as other types of products...this sector also uses substantially the remittance facilities, and other non-funds business.

You have pegged your long-term rate lower than the PLR (meant for working-capital loans). Your deposit rates on the longer term, however, are the highest among banks. Since there is no inverted yield curve, how is it possible to offer lower rates for long-term loans?

Now the inflation rate being what it is and the fundamentals of the economy as they are, we feel that over a period of time interest rates will come down. Since the international markets are being integrated with the Indian market, our interest rates will also have to be in line with international rates. Even if five years down line, capital-account convertibility takes place, there will be substantial downward pressure on interest rates. We have to see what the best way is to catalyse investments at this point of time.

As the leading financial insitution in the country we think that we should send out a clear signal that interest rates in the long term are coming down and you should be able to make investments.

You may ask why we have not reduced deposit rates. I perceive that the demand for credit in the next two years will be very strong and we have to be fully prepared for that with the right amount of deposit accretion. If at this time, if we let the direction of deposit drift away from the banking sector, then we have a trouble. This is a strategy...this is not necessarily related to economics.

Does that mean you are subidising long-term loans?

Not necessarily. I am taking a smaller margin on long-term loans. I am offering a little higher rate on deposits above three years. But this is only a part of my term deposit which forms only 60 per cent of my deposits and within this also, the three-years-and-above segment is only a given percentage. I am giving a little bit higher interest rates on long-term money to ensure that such deposits do not move away from us. Besides, we also want to serve the rural clients from whom these deposits come. This is a very instution-specific strategy to make sure that the resource base remains intact without any attack.

Is there demand for term financing at a cheaper rate?

Yes, a lot of people are now moving into us. Not only infrastructure sector, there are demands from other sector as well for loans. In the infrastructure sector things are looking up...now there will be drawals in the power sector.

Global rating agency Moody's has expressed concern about State Bank's non-performing assets. What's your plan to pare bad loans?

We are trying hard through recoveries and write-offs to bring down our NPAs. At the moment, the net NPA is pegged at 7.3 per cent. There might be a marginal improvement but that is all. There is no likelihood for a substantial improvement as the industry has not been in a very good shape in the first six months so even though we might have recovered Rs 1,000 crore almost an equal amount must have been added to the NPAs. It has certainly not gone up.

Will you break away from the industrywide wage settlement and broker your own wage pack with employees?

As of now, the plan is that we will go along with the industry.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.