RBI move positive; NPAs, NIMs likely to improve: Yes Bank
Speaking to CNBC-TV18, Rajat Monga, chief financial officer, Yes Bank says the bank‘s interest costs have gone down by approximately 2 percent from the earlier 10 percent, keeping in mind the 1 percent subvention seen in hedging cost provided by the central bank.
Hailing the RBI's move to allow banks to raise more capital from overseas markets, Rajat Monga, chief financial officer, Yes Bank says the lowering of rupee-dollar hedging costs will incentivise banks to lend in Indian currency.
Speaking to CNBC-TV18, Monga says the bank’s interest costs have gone down by approximately 2 percent from the earlier 10 percent, keeping in mind the 1 percent subvention seen in hedging cost provided by the central bank.
Additionally, Monga says the outlook for non-performing assets are less vicious in the near-term and net interest margins are likely to improve by 4-5 basis points (bps).
Below is the edited transcript of Monga’s interview to CNBC-TV18.
Q: Are you going to raise overseas debt post the Reserve Bank of India (RBI) increasing the limit from 50 percent to 100 percent of tier-I swap?
A: It is definitely a window of opportunity because the pricing has become quite attractive. If one looks at the math behind the summation that will go behind hedging cost etc, for a one year funding structure, about 60-70 bps of LIBOR, 150 point of spread and about 5 percent hedging cost will make it quite attractive in rupee terms.
It is quite important that RBI has given the levy in terms of lowering cost of hedging. That will incentivise the borrowers who will be able to raise foreign currency resources, swap them into rupees and also on lend in Indian currency.
Q: How much do you all already have in terms of overseas debt, what percentage of your tier I capital have already raised and therefore what elbow room do you have?
A: We would have used about 60-70 percent of the limit and that number changes depending upon old and new transactions maturing. So there would be about 60-70 percent utilisation of the old limit. And the new limit, RBI has doubled the limit. So, I think there would be about Rs 2,000-3,000 crore ability in terms of using that window for that kind of size of borrowing opportunity but over time.
Q: Do you think your costs of money is going down, how much may it go down by?
A: The cost will be a function of 2-3 variables. One will be the tenure of the funding. Lets take an example of one year funding. One year funding will be available at LIBOR plus 150 bps. Now LIBOR for one year will be about 60-70 bps, add to that 150 bps of spread. So, about 225 bps will be the dollar cost of taking one year dollar funding. Now we cannot keep that in dollar so we will have to swap that in rupee and pay the hedge cost.
Now the hedge cost is running at about 6.5 percent and RBI is offering 1 percent subvention on the hedge cost. So, it would be about 5.5 percent which will be the net hedge cost given the fact that RBI is willing to give the hedge at 1 percent below market. So, if we add all this - 70 bps, 150 bps and the remaining 4.5 percent will give us the landed cost of rupee. In this case, it would be a little less than 8 percent.
Hence, for a one year term we can expect the cost of lended rupee resources to be close to 8 percent which is quite attractive given the fact that the short-term interest rate in India have been raised and overnight money is spreading close to 10.25. So, this should be a reasonably attractive opportunity to pursue.
Q: Will any of these measures taken by the RBI impact the net interest margins (NIMs) of the bank, the last time we checked with you, you were confident of maintaining the NIMs at 3 percent, will there be any change because of these measures?
A: The view is still the same. NIMs are very much under the controllable structure. Our share of floating rate loan book is the highest in the banking industry. About 75 percent of our loans are linked to bank's base rate, which means that when we raise our base rates like we did on Aug 1 by 25 bps, our loan book yields increases by 20 bps. This gives us cover for increase in the cost of deposits that is coming through from the new deposits.
We have a very effective pass-through structure in our balance sheet and NIMs at the end of it should not be affected as long as pass through is effective. Now, this particular opportunity of funding is definitely going to add to margins. So, for Rs 2,000-3,000 crore size, it would be about 4-5 bps beneficial impact on NIMs.
Q: Coming back to that measure of the Foreign Currency Non-Resident (FCNR) deposits that can be swapped with RBI at 3.5 percent, can you run us through how much FCNR deposits the bank has at this point and will you benefit at all post the RBI announcement?
A: If one looks at cost of LIBOR+ 400, the challenge for a bank is how to lend that cost of deposit and who that borrower will be. So, if one is borrowing at LIBOR+400, they are you are potentially lending at LIBOR+600 and that is quite a serious cost in terms of the borrower as well.
Now, let’s say one doesn't want to lend in terms of dollar terms but wants to swap that into rupees. For a three year deposit at LIBOR+400, the lended rupee cost will come to 12 percent.
All this I am saying is prior to the recent RBI measures. But 12 percent is not a pretty rate in any case. So, what RBI has done a couple of days ago is what will give a lot of legs to this FCNR products because the swap cost is now fixed at 3.5 percent.
What that does is, it converts the lended cost of FCNR deposits in rupee terms at close to 9 percent and then on top of that it does not attract cash reserve ratio (CRR), statutory liquidity ratio (SLR). So, in equated terms, it is as good as a rupee deposit that bears reserves, CRR and SLR of about 8 percent effective rate. So, it is only now that FCNR (B) as a deposit has made sense for all the stakeholders. This should be an important product to pursue.
It is very difficult to say what kind of volumes it can generate but at some level more the merrier, because these are very tactical deposits for attractive yields for the depositors. So we should be targeting about USD 50-100 million of these deposits over next couple of months. That would be something that we should be hoping to certainly do.
Q: With the dollar getting expensive as well with some of the few banks raising base rates, Indian corporates have a double-whammy, what I your sense in terms of how NPLs will pan out for your own bank?
A: There is no particular drift onto NPAs, atleast nothing from the current RBI action. If one sees the interest rates that the RBI has raised at the short end have not really been transmitted to the real sector.
Some banks and mostly the non-government banks have raised their base rates by 20-30 bps. That is not a great kind of increase in cost for the borrower segment at all. So, there is no real shift in terms of what the NPA outlook is. We continue to look at near-term benign outlook for NPAs.
In fact, what we have been seeing is that the current cycle has been setting in for about two-and-a-half years now. So, in the first couple of years, there was more aggregation of poor performance beginning to show up when you look at your portfolio. But over the last 6 months, even that has stabilised. So, while there will be cyclical pressure on the NPAs, I do not think there is a near-term excitement at all. We should continue to trend within our guidance for the year which is credit cost of about 60 bps.