'Corporates now have multiple funding sources beyond banks, and many are sitting on large cash reserves.'
C S Setty, chairman of State Bank of India (SBI), in conversation with Tamal Bandyopadhyay, discusses the slowdown in credit growth, the Reserve Bank of India's (RBI's) reforms, and the potential impact of allowing private sector professionals into public-sector banks (PSBs).
Why is credit growth not picking up?
We're not lacking in credit growth. If you look at the RBI data, credit is growing in double digits -- which, in my view, is quite reasonable.
There's significant growth in micro, small and medium enterprise (MSME) credit.
Today, banks are more confident about lending to MSMEs because of better data availability and greater clarity in business models.
There's also strong credit demand from the agriculture sector. Both MSME and agriculture are growing at 16-17 per cent.
On the retail side, mortgage growth remains healthy. The only segment lagging is corporate credit.
Corporates now have multiple funding sources beyond banks, and many are sitting on large cash reserves.
When they do take up capital expenditure (capex), they prefer to use their own funds first.
Private capex alone can't rely on bank credit. Both the government and banks want private investment to return in full force.
Many companies are already operating at higher capacities -- technology now allows them to run at about 90 per cent utilisation.
Global and supply chain disruptions, along with tariff issues, have created some uncertainty, but private capex will come back soon.
This economy is driven by domestic consumption, and once that demand stabilises, capex will pick up.
Are banks facing challenges in mobilising deposits?
Structurally, bank balance sheets are evolving. Globally, banks rely less on deposits and more on market borrowings -- a result of financialisation, where money shifts from banks to other financial instruments.
The same trend is emerging in India.
Bank deposits have grown about 1.6 times, while mutual funds have trebled. That shows savers are diversifying their asset allocations.
While savers won't abandon bank deposits entirely, the flow into banks is slowing.
Casa (current account savings account) is being affected not just because government current accounts are shrinking and more savings are moving to markets, but also because savers are shifting to fixed deposits.
The share of fixed deposits has risen from 61 per cent to 64 per cent.
On the current account side, once PSBs realised that government accounts wouldn't be available in a big way, we moved aggressively into business banking -- an area previously dominated by private banks.
We're now gaining a dominant share in non-government current accounts.
How do you view the reforms the RBI is introducing in banking?
I must compliment the regulator for coming out with 22 measures. These announcements reflect confidence in the maturity of India's banking sector.
Take merger and acquisition (M&A) financing, for example -- it shows that banks are now ready to fund such transactions responsibly.
We'll continue to engage with the RBI on how this framework can be fine-tuned.
It's also wrong to assume that M&A financing will take up a large portion of banks' lending capacity.
The overall size of M&A finance is minuscule compared to India's Rs 220 trillion credit system.
The primary reason I sought approval for M&A financing was to ensure a level playing field and demonstrate our ability to assess such transactions.
This is just the first step towards expanding what banks can do in M&A.
The system today is robust, and when that's the case, the regulator rightly enables banks to broaden their activities while ensuring capital buffers are maintained.
How do you view the entry of private sector professionals into PSBs?
There's really no fundamental difference between public and private-sector banks -- apart from ownership.
If you take ownership out of the equation, the product structure and technology are quite similar.
If this initiative helps facilitate lateral movement, it's a good move. Culturally, though, challenges exist -- mainly around pay and incentives.
The public sector pay structure is an inverted pyramid: a large base of employees earns relatively well, but the gap widens considerably at senior levels.
If the government truly wants to attract private talent, it will need to revisit this structure.
That said, cultural adjustment is part of any transition -- anyone joining a new institution must reorient themselves.
How do you keep doubling your balance sheet every six years?
If nominal gross domestic product grows at 10 per cent and SBI grows 2 to 3 percentage points higher than that, the compounding effect ensures the balance sheet doubles in six to seven years.
Technology has been a major enabler. We're among the largest spenders on technology, with robust digital platforms and heavy investments in back-end systems.
When will the subsidiaries get listed?
SBI General Insurance and SBI Mutual Fund will be listed. The timing, however, is uncertain. Both companies are well-capitalised and don't require fresh capital at the moment.
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Feature Presentation: Aslam Hunani/Rediff