Banking the unbanked is Indias big success story

Arundhati Bhattacharya is the first woman to chair the State Bank of India (SBI), India's largest state-owned bank. Just before her retirement in early October, she took time out for 'India Global Business' during a visit to the UK to delve into Indian banking reforms and the promise of measures like demonetisation and Goods & Services Tax (GST) having a positive impact on the economy in the long term.

What does the new SBI bond index series launched in the UK mean for the Indian bond market

In respect of the Indian government bond market, we didn't have any international indices on which the international investors could take a call. The Indian bond market is around $1.7 trillion. With the launch of this index alongside FTSE Russell on the London Stock Exchange (LSE), our intention is to give people a benchmark based on which they can make investment calls.

At this point, there are no products linked to the launch. But we are hopeful that the LSE will help us in getting a few products in. We have already approached the capital market regulator in India to allow us to use this index in order to launch an ETF [exchange-traded fund]. But even though there may not be products in the interim, we still expect the index to be used by investors as a benchmark.

Today, there is a lot of capital that is wanting to come into India. However, what we lacked was that there was not enough depth in the form of various kinds of products and also what we lacked was the transparent benchmarks on which people could rely regarding the performance. Therefore, this index launch will assure international investors that they have a benchmark that is transparent, well governed and can easily rely upon.

What are SBI plans for its UK operations

SBI has a very large London main branch, which mainly does wholesale business and that has 11 branches which mainly does retail business.

We are going to de-merge the business. The London main branch will remain a branch of the State Bank of India and the 11 retail branches will form a subsidiary that will be incorporated in the UK. This is being done in line with the regulator's requirements that the retail operations be undertaken by a company that is registered in the UK. The time-frame for setting up State Bank of India UK Ltd is late this year or early next year.

This will lead to much greater focus on the retail business because it will be on its own and have to prove itself. And, it will have a board that will be local and most of the employees will be hired locally.

We will try to bring the very best of IT that we have and the very best of processes that we are using in India. It will also enable very quick links back to India. Many of the products that we offer in India are not available anywhere else in the world. A lot of innovation has taken place in India to ensure that banking services are made available in the easiest possible manner.

Does Brexit pose particular challenges for the bank's European operations

Brexit does pose a little bit of challenge in the sense that we were hoping that once the subsidiary was up and running, we could possibly use the passporting rights to have branches of the subsidiary in Europe, which at this point of time may not happen.

We have branches in Frankfurt and in Antwerp and a representative office in Paris. We may want something more in Europe, given the fact that Europe is among India's largest trading partners. So, we are exploring what can be done.

What is your view on the dip in growth rate as a result of demonetisation and GST

The lower growth rate is a temporary blip. You will have some short-term pains for long term gains. There cannot be a major reform or restructuring without expecting it to hit the growth rate some way or the other. If as a result of that you back off from making structural reforms, then it doesn't help the economy.

Growth of the last two or three quarters will soon be forgotten. But if you succeed in making a major structural change and a change for the better then definitely that few quarters' pain would be worth it. As more and more of the country's economy formalises, the growth rate is bound to come up.

Has demonetisation been a positive from a banking perspective

From the bank's point of view, we have gained in two areas notably on account of demonetisation. One area has been the huge increase in resources. The amount of money that came into the banks, even when the curbs were lifted has not all gone out. As a result of this huge inflow of low cost resources, banks were able to bring down the rates of lending by almost a 100 basis points. So, monetary transmission that was not taking place took place during that period on account of the rise in liquidity.

The second aspect we benefited from is the increase of digitisation. During demonetisation, our credit card usage went up by 450 per cent. It has since come down but has stabilised at around 290-300 per cent, which is still a huge increase. So, we feel we have done about three years' work of digitisation in 60 days. That again is a huge positive as it releases resources for us to do more value-added service instead of having to help people do low-value transactions.

The only negative was that during that period we had to keep aside all of our regular activities and just do money exchange. And, of course, there was the discomfort to the people trying to change their notes. We tried to make that process as painless as possible.

What has been the impact of the Jan Dhan Yojana on the ground

Banking the unbanked is a very big success story in India. With a million people coming on to the work stream every month, it is not possible for the government to create that many jobs in the organised sector. Therefore, in order to fulfil the aspirations of our youth, it is important to be able to empower them to do their own thing.

Indians are very entrepreneurial and innovative. So, if you give them the means of having enterprises of their own, they often do very well.

Jan Dhan is just the beginning. It literally means the wealth of the people. Financial inclusion does not just mean a bank account. It means we have to give them all banking services, insurance services, investment services as well as pension products. Only when you cover all of this gamut, you can talk about financial inclusion.

Four features of financial inclusion should be - accessibility, quality, use-ability and affordability. That is where aspects like the mobile platform, Aadhar-enabled interface and getting volumes to keep the margins low come in.

When we opened these financial inclusion accounts, 97 per cent were zero balance accounts. Today in SBI alone, their balance is to the tune of $3-billion. This year we expect to do transactions in the range of $18-20 billion in these accounts.

Jan Dhan has definitely been a good experiment. We need to build on it and deliver a lot more products as their credit history builds up.

Are non-performing assets (NPAs) becoming a thing of the past for Indian banking

It is a thing of the past in some ways. We didn't really have a very transparent and open manner of resolving stressed assets. Today, with the bankruptcy law, I think that gap has been filled. However, the bankruptcy law is still in its infancy and we are just about starting its use.

Our hope is that going forward it will continue to perform the way it was meant to perform. But only time will tell.

If it does perform the way it was intended, then definitely going forward NPAs in India will take a different shape - where companies at the very beginning of their difficulties will go and reorganise themselves and come back without having to create stress in the economy.

Also, India today is one of the youngest countries with a median age of around 26 years. It is adding on about a million people to its workforce every month. The dependency ratio is very favourable in India.

Given these factors and the fact that the macro parametres are all fine in India, we have no other direction to go but to grow. It is the pressure of demographics that will make India grow. The Indian economy is very well poised.