Don't expect rate cuts from banks immediately: BoB

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: How much of liquidity does this 50 bps CRR cut increase for the bank? Will it warrant a cut from the banks?

A: The calculations are well known- NDTL being Rs 60 lakh crore, it releases around Rs 16,000 crore per 25 bps; So 50 bps points means Rs 32,000 crore release. But CRR being a primary liquidity creation, it can lead to multiple credit creation, and therefore, I feel that the liquidity ultimately available to the banking industry as the credit growth builds up will be slightly larger.

The system had just about adequate liquidity before this. We were drawing around Rs 140,000 crore from RBI in repo and the excess SLR with the system was around Rs 160,000-170,000 crore. So this Rs 32,000 crore is a small amount, but as I said, this is primary liquidity.

Secondly, this is an indication of the things to come and therefore it’s an optimistic signal in an otherwise environment which had very few good signals for quite sometime - high inflation, low industrial growth- this started turning around.  This is another signal which on its own is good, and it will spur industrial growth. It will create optimism among the people, banker and industrials alike. Rate cuts from the banks may not be expected immediately.

Q: For Bank of Baroda in particular, this doesn’t really warrant a rate cut in the near future at all?

A: No, I don’t think so. In case of our bank, for example, it may release Rs 1,000 crore of funds which were tied up with RBI. Bank of Baroda, as it is, we were not short on liquidity; we were having adequate liquidity all this while, and this will release Rs 1,000 crore which were supposedly with RBI free of interest and now they can be deployed. But there is not much demand of credit also from there.

Then, repo rate and reverse repo rates have continued to be whatever they are. The inflation concerns in the manufacturing sector are still not gone. Recently, the NRE deposit increases have put cost pressures on the banks.

I really don’t think that immediately a rate cut may happen but it can happen somewhere down the line, sooner than we would have earlier thought. But this signal, it may lead to a reverse repo rate cut going forward. This is signalling lower rate regime going forward, not immediately.

Q: With the additional liquidity which will now be in the system, not only the primary but on account of the multiplier effect as well, what is the credit growth improvement we could expect perhaps in FY13?

A: Credit growth estimation is a factor of many things; it’s not only the cost of money and the availability of money. We have seen last year the major destroying factor for credit growth was not interest rate, but projects getting slowed down because of non-approvals and things like that.

Retail sector might have suffered a little bit because of interest rates. The industrial sector, particularly the infrastructure and all, they were governed more by clearances getting delayed and project executions getting delayed and non-clarity on environmental clearances and other linkages.

But yes, these are good signals. Government has also been making good signals in trying to see that project implementation and project clearances are expedited.

So we definitely look to the next year with much more optimism compared to this year 16% what RBI has indicated. I cannot put my finger on an exact number because that is a combination of so many factors. With the RBI being privy to primary data collection, they may be indicating in April as to what the outlook is, but yes, it will definitely be better than this; it may be around 20% next year for all we know.

Q: We can’t let you go unless we talk about the asset quality and what we could expect from the bank possibly in the coming quarters?

A: This quarter results are going to be declared tomorrow, so I cannot talk about it. But yes, Bank of Baroda has always maintained a very high asset quality and we think that we are on path to maintain that. Interest rate easing will definitely improve industrial performance and service sector performance and therefore asset quality concerns will ease off for the sector as a whole. But Bank of Baroda has always maintained good quality. We will maintain the trend going forward also.

Q: We have seen the bond yields over the past maybe month or so come down quite significantly first from that 9% odd level. What will be the benefit to your bond portfolio for Bank of Baroda in particular?

A: Again because the results are just around the corner, it’s not possible for me to talk about that. What happens is a lot of portfolio, more than 80% is held and held to maturity. There you do not get either a mark-to-market benefit or a sale benefit to that extent. The AFS portfolio is by far small. Even in December, we were better placed; not to have too much of a mark-to-market losses though there were some. But now definitely we will be in a position to do better trading and better profit booking. We have got a small AFS portfolio. But going forward with the rate of interest coming down, I think it signals a better valuation gain in the HTM portfolio also, some of which can be transferred to AFS in the beginning of the next year.