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Jun 14, 2013 05:57 PM IST | Source: CNBC-TV18

Deposit rates still high, June 17 to be non-event: UCO Bk

Arun Kaul of UCO Bank said that he did not expect a rate cut by the RBI in its next policy meet. He added that liquidity infusion in the economy after the inflation data was not on RBI's agenda.

Arun Kaul of UCO Bank said that the Reserve Bank of India (RBI) might not have a rate cut in the next policy meeting. This is due to the recent rupee fall and better returns from US bond yields.

Like the rest of the street, Kaul too does not expect a rate cut on June 17. However, the July 30 policy meet may see the central banks cutting rates if currency fall is arrested and current account deficit (CAD) is contained. When asked by when banks could pass on the rate cuts, Kaul said, "If the liquidity goes up in the system, deposit rates would come down enabling the banks to cut down the lending rate for which we will have to wait and watch for a little more time."

On a more contagious issue of bailout packages offered to power distribution companies (discoms), he said that Rajasthan, Haryana and Uttar Pradesh discoms have agreed to implement the package.

“All these three packages will help us to convert the bonds 50 percent and 50 percent to continue as a state guaranteed loan,” said Kaul. 

He said that the provisions for the net present value (NPV) losses was around Rs 300-400 crore.

Also read: Haryana discom restructuring under process: OBC CMD

Below is the edited transcript of his interview to CNBC-TV18.

Q: You saw the inflation number of 4.7 percent. What is your expectation on June 17 (RBI policy meeting) and setting aside that we have already had a lot of cuts from the Reserve Bank of India (RBI)? Do you see in the next 30-60 days, any possibility of a cut in deposit or lending rates?

A: Inflation has come on the expected lines. We have seen immediate reaction in the market. Yield of the government have slightly moved down, the 7.16 paper in the morning was at 7.33 percent which has come to 7.30 percent. And the 8.15 paper in the morning was at 7.54-7.55 percent has come down to 7.50 percent. So, there is slight relief in the market immediately.

Going ahead there are certain challenges for interest rate environment. Current account deficit (CAD) is very large. We are aware about the pressure on the currency and that US yields are going up. So market would be very keenly watching as to what steps RBI would take.

About 15-20 days back there were concerns in the market that certainly a cut in the repo rate will take place on June 17. On the street, the feeling is that RBI could wait and watch for a little more time before there an interest rate cut. So, it looks like the cut may not come on June 17.

Coming to deposit rates, we have not seen substantial reduction in deposit rates. Even yesterday and today, we saw one year Certificate of Deposit (CD) at about 8.40-8.45 percent.

Although, the 10-year government securities (G-Secs) have substantially come down, it has not translated into deposit rate cutting down. That is what is preventing banks from cutting the lending rates.

If the liquidity goes up in the system, deposit rates would come down enabling the banks to cut down the lending rate for which we will have to wait and watch for a little more time.

Q: Do you think that the door opens allowing more liquidity because in a seminal way, inflation has fallen. The RBI governor even said that in the household survey, the monthly for inflation expectations in April they had seen a dip for the first time. Do you think the RBI could allow more liquidity in the system after this threat to the rupee fades away?

A: The very fact that inflation has come down should have enabled RBI to increase liquidity. But the CAD is a real threat with us. Rupee has been under pressure for quite sometime and currency account is a very large deficit.

Under this condition RBI will have to take a very careful balance between building the liquidity on the one side and the pressure on the rupee on the other side.

Liquidity is not very uncomfortable. The borrowing by banks is hardly about Rs 44,000-45,000 crore from RBI; which has been the comfort level of the RBI.

Under these conditions the RBI will not like to further add liquidity immediately in the market. They would certainly like to control the CAD. A large liquidity can certainly lead to pressure on the currency, which they would like to avoid.

But the inflationary condition should have forced the RBI or helped them to increase liquidity in the system.

Q: I just had one question with regards to what the RBI would do for the July 30 policy (meet). Do you think that the RBI will cut rates given the fact that inflation has fallen; on growth concerns, and the monsoon progressing normally?

A: Yes falling inflation and the growth concern should enable RBI to cut rates. However, that would depend upon CAD and the pressure on the currency. If we are able to reduce both, it will certainly help the RBI to cut the rates.

There is a strong case for rate cuts undoubtedly.

Q: Yesterday the Oriental Bank of Commerce (OBC) chairman said that the Haryana discom bailout package is practically through and only the individual banks will have to get their approvals from their respective credit committees. The Uttar Pradesh bailout through and Tamil Nadu perhaps is also in the bag. How much does that relieve tension for you? How will your profit and loss (P&L) improve in the in the current quarter or later because of these important changes? What are your exposures?

A: We have exposure in Rajasthan, Haryana, Uttar Pradesh, Tamil Nadu, Punjab and Gujarat. Punjab and Gujarat, there is no problem. Tamil Nadu has already been implemented. UP, Haryana, Rajasthan have also been agreed to implement the Government of India package.

We have earlier done one restructuring for them. But all these three packages will help us to convert the bonds 50 percent and 50 percent to continue as a state guaranteed loan.

There could be some net present value (NPV) losses for us in the current financial year because this restructuring will be spread over the next 3-4 quarters. But it will not be very large considering the operating profit we have.

Q: Can you just give us the numbers? What is your exposure to each of them and a ballpark NPV loss? How many provisions go up on this account?

A: Total provision throughout the year would be about Rs 300-400 crore.

Q: And your respective exposures?

A: For exposures between Rs 7,000-8,000 crore all discoms put together.


Q: What is your likelihood in terms of your non-performing loan (NPL) performance? In the current quarter are you seeing a dip? Are you seeing a dip in the next quarter? What is the trajectory that you see as of now on the NPL performance?

A: We have a fairly large corporate credit portfolio. The economy is not been doing well. There was stress in our corporate credit portfolio and our NPLs went up. Fairly large slippage has taken place in the last two years.

Going forward, we are hopeful of containing the slippages and whatever steps we are taking the recovery has started yielding extremely good results.

So, we are very hopeful that the recovery in the current quarter should be matching slippages. We should not see any substantial increase in our gross or net non-performing assets (NPAs).

On the contrary, we see fairly strong improvement in our operating profits because of two factors. Our current account & savings account (CASA) has improved substantially. It used to be about two years back 21-22 percent, today it is almost about 34 percent. This has led to a strong improvement in operating profits.

We have seen last year’s operating profit improved 20 percent and last quarter by about 40 percent.

We expect current quarter also operating profit improve substantially. So that should help us to clean the bank’s balance sheet and show a very strong bottom-line.

Q: The quality of assets has also been a concern for a while. What about the restructured assets in the first quarter of FY14? And in subsequent quarters, what kind of restructured assets or restructuring do you think you can see?

A: Our restructured assets constitute highly about 7-7.5 percent of our total loan book. It is not a very large figure and I don’t see a very large restructuring book.

Q: What about slippages? Would you have something at all for Q1? It was Rs 1,400 crore in Q4?

A: It should be much less than this and our recovery should be almost equivalent to our slippages.

Q: The sugar industry in practically the doldrums. In fact, the numbers were scary. Sugarcane prices have been rising at a compounded annual growth rate (CAGR) of 14 percent over the past three years. Sugar prices have been rising at three percent CAGR and they are looking at a similar trajectory for the current year as well given that already higher price have been announced by the central government and the UP government is looking to raise its state advised price. Do you have exposure there and is that a budding area of NPL?

A: We have a very small exposure in sugar. It is hardly about Rs 100 crore or Rs 200 crore. It is not a much of a worry for us. It is a very small exposure.

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