Mumbai: What a year it has been for the Indian banking sector, and the road ahead too doesn't seem to be very smooth. Every macro economic indicator got worse, perhaps worse than we have ever seen it except the six months post Lehman. Inflation has been above 9 per cent for all the months of 2011 and GDP too, for the first time in 11 quarters, dipped below the 7 per cent mark.
Fiscal deficit also is at the worst ever level since the crisis. Every year, borrowings have been ascending in sequence from over Rs 1 lakh crore to Rs 3 lakh crore and this year, the fiscal gap might just be as high as Rs 5 lakh crore.
While every macro economic parameter is looking difficult, perhaps the most important one will be growth. CNBC-TV18 catches up with the chairman of the country's biggest bank, Pratip Chaudhury of SBI to get a sense of where the economy is headed in 2012.
He points out to projects are stuck because the companies are unsure of profitability. Chaudhury agrees that investment sentiment is currently down in the dumps and says that PSUs must take the initiative to spruce up the climate.
As for his own bank, SBI's worst may be behind it. Chaudhuri says the bank's incremental loan slippages in the third quarter will be 20-25 per cent lower than in the second quarter. He expects margins to remain above 3.75 per cent because he expect neither rates to fall until March nor savings rate to increase, despite competition from small banks.
Below is the edited transcript of the interview of Chaudhury by CNBC-TV18's Latha Venkatesh. Also watch the accompanying video.
Q: Do you think that this downturn that we have hit is likely to be there for a better part of 2012? Will it be the biggest theme growth not doing well enough?
A: I think we should also look at how we are positioned for future growth. The growth we are getting today is possibly the end-result of the investment flows that would have happened two-three years ago. Month-to-month growth, if it's slightly decelerates, and overall in the slowing world economy with Europe doing not too well, even 6.5-6.9 per cent would not be a great shock. But we must build the foundations for a stronger growth henceforth, as you said, 2012 and beyond.
Q: That is the problem. What we are getting by way of GDP numbers perhaps is not the biggest concern but what we are getting by way of investments seems to be worrisome. Banker after banker is telling us that fresh sanctions are not happening. You all are disbursing last year's sanctions. You tell us - how bad is the investment climate?
A: I agree with you, the investment pipeline is relatively dry. That has to change and major capex program needs to be launched. It need to be signature or headline kind of numbers; even the companies who have ongoing capex, they should be accelerated. At least in this, the PSUs can possibly take the lead because most of our public sector companies are in capital intensive areas- be it in steel, coal, fertilizer, refineries, gas pipeline… so once that momentum starts, then it can spread to other sectors and it would help us changing the mood and generating some positive feelings.
Q: You moved around Rs 15 lakh crore, the government's expenditure budget is a little less than that. What is the bottleneck for investment is it the cost of money with the series of rate hikes is perhaps a little stiff is that the problem or is that the projects that are coming to you are worried about policy at another level like mining ban or environmental norms midway getting changed? Largest numbers of projects are stuck for what?
A: Projects are stuck because the companies are unsure of the profitability. Now even if the policy hurdles are significant, for example in many countries which have posted high growth the policy hurdles are significant, clearing regulatory hurdles are significant; but if they think at the end of the day, they will have a significant amount of good profits, then they still pursue with the projects like in India.
Of course, lower interest rates would help because especially for large projects when there is a two-three year completion period, interest during the construction period is very material. So if you are having an environment of 5-6 per cent interest cost and if it is 12 per cent, it makes a whole lot of difference.
To that extent the global environment has also not helped because globally, capital was cheap, capital was looking for a home. So India also got its share of capital, which came cheaper, so the cost of growth was cheaper. Now the cost of growth having escalated, companies want to make sure that they have enough return post tax to meet that enhanced cost of capital.
Q: For 2012 at least the first half if you can see with any clarity do you expect that the cost of money will go lower in whatever way, away from the market or because big banks like yours will be able to give money or will be forced to give money a little cheaply?
A: Nobody would be forced, money will be going according to demand and supply and everybody would do business on a cost plus basis. I do not think the rupee credit would get cheaper earlier than March '12 because RBI has made it clear that they would like to sniff out any stresses of inflation. So of course we can expect some halt in the hiking regularity but to expect that would be a little unrealistic.
What I am saying is that even if the rupee credit remains expensive there are ways of injecting dollar credit which is generally cheaper.
Q: How confident are you of 2012?
A: 2012 should be better because all the factors that have combined. Also because we think that the global uncertainties would to some extent abate. Already the plus point is that the US is showing a growth up of 2 per cent which many analysts are saying that it could even be 3.5 per cent and let us remember that US is the biggest consumer engine and second it has so much of a motivating aspect if US does right the whole world feels that it is good time.
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