SL Bansal, CMD of Oriental Bank of Commerce expects more public sector banks to cut interest rates, which will mean a 10 basis point hit on margins.
"The net interest margins (NIM) of the bank will be around 2.9 percent in the first quarter," he told CNBC-TV18 in an interview.
Bansal said that the lower short-term deposit rates and healthy statutory liquidity ratio (SLR) conditions will give help banks to cut rates. However, he says, rate cuts won’t have an immediate impact. He sees credit rates picking up in the next six months.
Finance Minister P Chidambaram on Wednesday asked public sector banks to reduce their base rates to boost investor sentiment.
Below is the edited transcript of his interview to CNBC-TV18.
Q: What is your sense, more public sector banks will follow suite you think?
A: Yes, I think most PSU banks will follow the suite.
Q: What gives them the space now? If anything, market related yields have gone up? So what gives you the elbow room to cut rates? How much will they fall?
A: There are two things. In the last three months, you will appreciate that the short-term deposit rates have fallen substantially. For the first time in March 2013, the short-term deposit rates had not moved up beyond a point while every year, they had been shooting up even 10 percent plus.
Liquidity, most of the times, is comfortable. There may be some shortage of liquidity in the system. But most of the banks are sitting surplus on SLR. They are in a position to raise resources comfortably at 7.25 percent.
Although Finance Minister (FM) is giving that Reserve Bank of India (RBI) has cut repo rate by 125 bps and banks have passed only 25 bps, repo rate does not have a direct bearing on our cost of deposits.
We argued out with the FM that our cost of deposit is not coming down because inflation is a major indicator whether the retail term deposit will flow into the banking system.
However, he is of the opinion that cut in base rate will send a strong signal to the slowing economy. So, the banks will take up this challenge and slight adjustment in margins will not stay.
Q: What will your margins look those banks that cut rates? One should definitely see shaving off of net interest margins in Q2?
A: OBC’s cost of deposit in Q1 has come down by 8 bps. Going forward, it is going to fall further due to re-pricing of the deposits. So, if we are cutting our base rate by 20-25 bps, we will take a call.
We will meet shortly in the Asset-Liability Committee (ALCO) and then take a call. The 10-12 bps savings in the cost and taking 10-12 bps off the margin, this quarter may be close to 2.90 percent. So a 10 bps hit on the margins will be a fair call when you have to look at the larger issue.
Q: Do you see any improvement at all in credit growth because the rates will be passed on?
A: I don't think that cut in the interest rate immediately will spark of any credit growth but of course the mood will change towards positive. Then the credit growth will pick up only after six-nine months.
Everybody now is in gloom mood. People are not applying their mind. They are sad whether they will go for fresh proposals or not. So we are not seeing any activity on the ground level.