The Reserve Bank of India cut interest rates for the first time in three years by an unexpectedly sharp 50 basis points. This rate cut will certainly translate into savings for banks, says Diwakar Gupta, managing director and chief financial officer, State Bank of India (SBI).
The central bank has also raised the borrowing limit of banks under marginal standing facility to 2% from 1%. This step will make a concrete difference because banks with now be able to get resources at cheaper rates and it will give them some room for rate cut, he told CNBC-TV18.
Meanwhile, Diwakar admits that deposits will be affected because of rates offered on national small savings and tax bonds, but he doesn't see an upward pressure on deposit rates till credit growth picks up very significantly. On the contrary, he expects deposit and advances rates to ease ahead.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: Will the banking system pass this 50 bps?
Gupta: The very fact that the marginal standing facility has been upped 2% makes a concrete difference to banks. Banks which have been raising resources at more than 9% have a clear window in which case they can raise resources at below 9% or at 9%. It gives them some more insurance in question against liquidity volatility, which could allow them to factor their deposit rates in at a little lower. It will certainly translate into a saving for banks and makes it much easier for banks to take a view on a rate cut.
Q: Will this be on both legs, deposits as well as lending? Will there be more of deposit cuts?
A: Naturally, it will help the banks to raise resources at a cheaper rate and they can cut down on deposits and pass on to loans and advances.
Q: Will it be the same proportion?
Gupta: That is very hard to say because deposits are in different buckets, they price at different maturity and the duration is different. Whereas most advances are floating at least 60-70%, most banks would be repricing in real time, so they may not be in the same quantum initially, but eventually it should catch up.
Q: How would you see this quarter panning out, will bank margins be under pressure?
Gupta: The numbers of March, 30 may not be indicative of growth year on year. There was a spike on March 30 and the banking system would already be seeing a fair reduction in both deposits and advances. The important thing is deposit taking will be affected because of rates on national small savings and tax bonds.
But, till credit growth picks up very significantly, I do not foresee an upward pressure on deposit rates. On the contrary, there is a case for deposit and advances rates coming down simultaneously, though not by same quantum.
Q: Your margins will be a little under pressure or not at all? Will be similar to 4th quarter?
Gupta: Margins will be largely maintained, there will be some amount of reduction because assets reprise faster than liabilities in a falling rate regime. Therefore in the short term, advances will earn less than you have to pay on deposits, may be 10-15 bps that’s all.
Q: There was another minor point that I wanted to bring to your notice since you are also a very big home loan lender- all floating rate loans hereafter can not attract penalty at all for closures does that change the game, does it make it a little more competitive a little more difficult for banks somewhere margins are getting chased of?
Gupta: We have already abolished prepayment penalty on home loans, so it does not change anything for us. It gives a more level playing field to clients and that is fine, that is good.
Q: As more banks come for instance an ICICI Bank which is big on floating rate home loans, as they get into the same mode they haven’t yet abolished but now that they have to mandatorily do that does that have some impact on margins? Will it hurt?
Gupta: I would think the customer now has choice so he will go to wherever he thinks he is getting value. It increase competition amongst banks and it prevents restrictive practices. I don’t think it will have an impact on margins per se.
Some banks may benefit, some might lose depending on the practices they were following hitherto, but abolishing it is advantageous for a bank which is sure about its portfolio. To that extent State Bank of India is fortunately in a better position. We can only have inward migration when exit level barriers get removed for the others.