Pratip Chaudhuri, chairman, SBI; Chanda Kochhar, MD & CEO, ICICI Bank and Aditya Puri, MD, HDFC Bank talk about the affect of the new monetary policy on lending and deposit rates and what should be expected from the RBI in coming January.
"I don't think that there would be no change in SBI’s deposit and lending rates," says Chaudhuri.
Below is the edited transcript of his interview to CNBC-TV18.
Q: Considering that now Reserve Bank of India (RBI) is looking at giving liquidity and possible policy support in January. Will you look at giving or possibly looking at a small base rate cut possibly in January?
Chaudhuri: Let's see what happens. Unless it happens it is difficult to consider. All banks have their own Asset Liability Committee (ALCO), so it would not be correct for an individual to decide on that basis. When the policy rate changes, upwards or downwards, the ALCO being a larger group takes into account all the ramifications and all the implications and then decides on the pricing model.
Q: Are you all set to cut rates possibly in January?
Kochhar: This was just a review of the policy. When we talk of interest rates, we need to understand that it is not just one policy rate announcement that changes the rates in the markets, its rates across various segments of deposits, the cost of funds for the banks and therefore the lending rate.
In last six-seven months some cuts took place, wholesale deposit rates also corrected. Retail deposit rates did not see much correction. On the whole, the cost of funds for the banking sector went down a little bit and correspondingly banks reduced their base rates.
Some banks did it early, some did it latter, some did it across products, and some did it in the base rate. So, the movement in lending rates happens with the whole movement in cost of funds. It is too early to say what action will happen in January. I do believe that in the next quarter or starting next quarter interest rates should see a downward trend. However, it would be difficult to say how fast, how sharp, how early.
Q: Considering that RBI is promising that liquidity support. Do you therefore expect cost of funds to go down and therefore potentially see the lending rates also going down?
Puri: As of now, liquidity is tight. Money supply has not grown in line with what the RBI has mentioned. So, if there is substantial liquidity like Liquidity Adjustment Facility (LAF) at about Rs 20000-30000 crore, as the colleagues have said then the cost of funds could change and there is a very clear mechanism, if cost of fund changes then we change the base rate. So, we unfortunately cannot introduce magic in this equation. So, if our costs change, the base rates will change because we are very conscious of our consumer responsibility.
Q: Considering that RBI would possibly go ahead a with a minimum of 25 basis points of repo rate cut, do you therefore feel that you would be able to pass on that?
Puri: We were expecting it to happen this time. So, let's wait and see.
Q: Sentiment seems to have change; do you feel that the current RBI policy stance or probably the shift in the policy stance could give sentiment to greater credit growth going forward?
Chadhuri: Not particularly, because the differential between the rupee and the dollar rates are pretty high. We are seeing an increasingly large number of customers request for substituting their rupee debt with dollar debt. So, I don't see a very robust outlook for the growth in the credit book, loan book and the rupee. For SBI today, the growth is largely coming from retail and consumer finance front.
Q: Do you expect loan growth picking up because of the signal from the RBI that it is going to change the policy stance?
Kochhar: Interest rates are only one factor that drives credit growth. A lot also depends on what are the other sources and cost of fund from other sources. Second, is the whole investment cycle. Currently, growth is holding up well on retail credit front and well on the working capital front. However, for a big pick-up in the credit growth, one has to look forward to the restart of investment cycle.
Q: Do you see that turning around in the next couple of months?
Kochhar: It all depends on how the ground level actions get translated into last mile completion of the projects. Positively, there is a lot of determination today at the decision making levels to say lets take reforms forward. The broad policy reforms have started, but for the projects to really move we need lot of ground level action, be whether it is land acquisition or environmental clearances or backward linkages on raw material etc, till that happens and a lot of the existing projects really start generating cash flows, the corporates would wait for that to happen to really commit their money in the next round of investments.
Q: When do you expect the turnaround to happen? Corporates coming to bankers to borrow more or do you see the kind of credit growth that you possibly saw in the last two years?
Puri: The financial economy follows the real economy. So, are the signs positive? Yes. Would those actions need some time before they translate into actions in terms of investment? I think it is too early, but we could be able to answer you that much better in next three or four months. The signs are positive.
At this point of time unless the investment demand picks up and like my colleagues said, that’s not only a function of either the RBI policy or the bank interest rate, but getting some things right. So, the National Investment Board (NIB) is good. If we can reduce our deficit that would be great, if we can get cash transfers going, if we can get a more coordinated approach and remove the hurdles, then we are on the right track, but have we reached there as yet, I think, probably not.
Q: Where do you expect the growth to be this and next year?
Puri: GDP growth should be around 5.5 percent. I am an optimist, so by next year, if we would have got things right then around six percent.
Kochhar: This time our estimate is about 5.7 percent. Next year we should cross six percent.
Chaudhuri: I think 5.5 percent, but optimism has to be balanced with realism. So, 5.5 percent and next year given the urgency that is now being shown we should strive for and hope for seven percent growth rate.
Q: How do you see the non-performing assets (NPA) situation? Is that going to see a change? Has that bottomed out? Are bankers looking at starting afresh in 2013, how is the scene looks?
Chaudhuri: It will depend on the condition of our companies. The NPA situation is very different for different banks. So, I think the NPA situation is largely micro.
Having said that the overall stresses remain, specially those who are in contracting business and are dependent on government companies or agencies for getting their receivables, there the situations remains difficult, but the banks have become more realistic and are investing lot more resources to keep the home fire burning and keep the NPA situation under control.