Pratip Chaudhari, former CMD, State Bank of India spoke to CNBC-TV18 regarding his expectations from the Budget for banking sector. According to him, the sector needs to see bigger reforms for bank deposits and the tax treatment on bank deposits should be rationalised.
Chaudhari believes the tax deducted at source (TDS) process on bank deposits needs to be revamped and its threshold must be increased.
He also adds that tax-free bonds must be abolished because companies like NTPC need not go directly to the public and raise deposits but can come directly to the banking space. It creates discrepancy and unfair competition in the saving space, he adds.
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The banking sector has been expecting a capital infusion by the new government in the public sector banks. The sector is also hopeful that government may reduce its holding cap below 58 percent.
Below is the verbatim transcript of Pratip Chaudhuri's interview with Ekta Batra and Anuj Singhal on CNBC-TV18
Ekta: One of the key expectations that have been spoken about is the possibility of a merger of SBI subsidiaries with SBI itself. Having worked as the CMD of SBI, this must have come up multiple times as an issue while you were the chairman. What would be the impediments to something like this and what would be the feasibility of this?
A: There are no impediments; the economic rationale for a merger is very strong, only thing it needs to be spaced out because if there are five associate banks and if all of them are merged in one go then it could lead to lot of destabilisation particularly the human resource (HR) angel.
Therefore, one merger in every two years would be a good frequency and we need no come through the Budget itself because this is a different administrative process or a business process and so, it need not necessarily be linked to the Budget but on the larger issue of concern there is a case for consolidation among larger public sector banks and even some of the private sector banks because the Indian banking space is too fragmented.
Ekta: One of the things that you did bring up is that the possibility of employees or unions going against a merger, would that be a significant issue if in case there is only a statement of intent?
A: They are not against merger because when you do a merger, the compensation structure of associate banks is lower than that of the parent bank. So even at the time of the previous two mergers, there is an economic cost to that and that economic cost at current scenario is between Rs 1,500 crore and Rs 2,000 crore per bank. So is it right to load it all in one year?
Secondly, if you look at merging State Bank of Hyderabad with State Bank of India (SBI) then in Andhra Pradesh, there would be 2,500 branches. Now you leave the particular apparatus, currently, we have one local head office at Hyderabad but then it needs to be spaced out responding to the political aspirations of different regions, you need to create different local head offices and others. So there are whole lot of administrative and staff issues. I am not suggesting that the staff is opposed to this but some rationalisation is required.
Anuj: What else should be on top of the radar for PSU banks from the Union Budget, would it be the capital infusion, maybe reducing the cap of the government's stake?
A: Let us not segregate the banks into private and public because some issues are of common interest to both private and public. Today's tax structure discriminates against bank savings and so, that should be reduced if not eliminated. The tax treatment and bank deposit needs to be liberalised. There should be a greater exemption for bank deposit interest.
Secondly, this mindless exemption of tax free bonds to some of the leading public sector companies should stop because companies like NTPC need not go directly to the public and raise deposits. In fact, they can come to the banking system which will be too happy - because they are so eminently credit worthy - to lend them at the finest terms. It creates discrepancy and unfair competition in the saving space.
Thirdly, small savings rates have gone up to 8.8. Is that justified? If there is a slight reduction in the small savings rate, that would give room to the banks to lower the deposit rate and also to cut the lending rate. This is because without cutting the lending rate, there is no way the industrial growth can be kick-started unless in the industrial growth once it is kick-started, you will get revenue growth, you will get growth in employment.
Therefore, this kind of discrepancy should be done away with and there is unnecessary paperwork. Imagine, beyond Rs 10,000 of bank interest, there is a TDS and a TDS filing. Even a class IV employee when he or she retires, gets Rs 5-6 lakh as terminal dues. Even you require them to go through TDS process? I think this TDS process earlier was slightly liberalised and it has not led to any drop in the revenue and today with the PAN number, we can capture every bit of bank deposit interest. So the TDS threshold should be increased and this tax-free bond should be abolished and whatever savings benefits are given, they should be given across the industry no matter who is raising the funds.
Ekta: What are your thoughts with regards to the feasibility of a holding company structure which, according to reports, indicates that the government is contemplating with regards to PSU banks?
A: That would not be very different and it is for the government to take a call, it has been there for last five years but no calls have been taken. This is because when Indian banks go abroad, or go to the market to raise funding, you will find if it is directly owned by the government of India then the investor perception is better.
I do not know whether the same perception would continue if it is through a holding company. Therefore, these kind of decisions have to be taken with lot of care and deliberation and given that the government has so many challenges to deal with, I do no think these matters should be rush through. In case you want to do a holding company, you need no do it right now at the Budget, you can do it during the year, during next five years or during anytime but the pros and cons have to be made very clear.
Ekta: What about Rs 11,200 crore that was setout in the interim Budget as the Bank recapitalisation amount? Expectation is that will not be increased and then PSU banks will have to tap into the markets or reduce the government holding in order to supplement them in terms of their additional credit needs. Do you think that will be the way forward that eventually bank recapitalisation amount by the government will reduce and this is the first year that we could see it implemented?
A: These numbers don't mean anything. Last year whatever amount was kept out was not disbursed and so, these are the numbers only in projection and in the previous years, the government, this number was the direct investment by government which got supplemented by subscription from LIC and others. Therefore, bank capitalisation need would be a function of the credit loan and with this kind of anemic industrial growth, I do not see much prospect of bank credit growth happening and most of the bank balance sheets are unnecessarily bloated up and they can be reduced and the approach for providing capital should not just be through capital but there are umpteen other innovative ways.
For example, if you introduce a credit guarantee scheme for educational loan which is about Rs 60,000 crore in the system then the capital requirement of bank should drop from something like Rs 6,000 crore to Rs 2,000 crore.
Similarly, if the credit guarantee scheme for SME is increased, currently it is loans upto Rs 1 crore are guarantee, if that limit is enhanced to Rs 2 crore and possibly 5 crore then the capital requirement on account of lending to SMEs would also drop substantially and these are not India met contraction.
For example, in Canada which is a developed economy, home loans that are major stay of the banks are guaranteed to the extent of 90 percent by sovereign corporation with the result that one Canadian bank leads billions of dollars they provide only a few million for capital. So, the capital requirement can be tempered by other instrument, by other measures like credit guarantee and unfortunately, the credit guarantee scheme for educational loans which was rolled out in 2011 or 2012, was made an announcement but never was preceded.
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