Refuting reports that the government has ordered PSU banks to lower rates, banking secretary DK Mittal told CNBC-TV18 that they have only "advised" PSU banks to "re-look" at their rates which are higher than private banks.
Though desired, there is no truth in news doing the rounds public sector banks have been ordered to cut rates after repo rates were slashed by 50 bps on Tuesday. Refuting such report published by a section of the press, banking secretary DK Mittal told CNBC-TV18 that they have only "advised" PSU banks to "re-look" at their rates which are higher than private banks.
Below is the edited transcript DK Mittal's interview on CNBC-TV18.
Q: There are reports that you have written to bank chairmen asking them to cut interest rates after the repo cut and the CRR cut by the Reserve Bank of India (RBI), is that true?
A: No, that is not correct. What we have advised banks is to relook at the whole structure of the rates and that is in larger perspective, particularly of retail loans, where the public sector banks are charging higher rates and higher amount than the competitor. But we have suggested them to relook at the whole rate policy that they have in view of the repo and the CRR cut.
Q: In case after the review some of them believe there is no case to lower their, for instance, base rates, would that satisfy you?
A: Yes 100% because that is commercialism. The lending rates will have to go along with the deposit rates. We will have to track both and each bank has a different kind of a deposit portfolio. So they will have to act inline with the deposit portfolio they have.
Q: There is a feeling in the market that perhaps lending rates will be reprised faster than deposits and that could lead to a compression in margins. Do you think margins could be under some kind of pressure if the base rates were to be cut and the repo cut being passed through because deposits are not very high currently?
A: I will not say that the scenario is not possible. But that is why the banks will have to take a call as to how they are placed in terms of the deposits, the levels of CASA (current account, savings account) with them and their ability to mobilise CASA.
We have suggested banks to take that call instead of reaching a stage where they would not be able to decide on anything. This is important from the economy and banking point of view.
Q: You mentioned that lending rates of public sector banks were higher than that of private banks?
A: Yes, that is right. Particularly in the case of housing loans which are of Rs 25 lakh and above. Most of the public sector banks, with the exception of the State Bank of India (SBI), lend at rates much higher than the private sector banks and non-banking financial companies (NBFCs).
Q: Have you directed PSU banks to lower lending rates?
A: No. But we have pointed it out to them because it contained an entire gamut of factors affecting the retail growth such as pricing, procedures, timelines and appraisal pressure. Retail loans is a segment that is reasonably vibrant with lesser risks.
Q: So it’s with respect to retail loans that you notice this higher pricing?
A: That observation has already been recorded. In general, we review the pricing based on the CRR cut. This is in line with the RBI’s thinking that the transmission effect of the cut should be implemented.
But we have not forced anybody or asked anybody to reduce lending rates. What we have suggested PSU banks to do is to take a decision quickly.
Q: The rate cycle is turning; the cut of 50 bps was a surprise to the market as well. Do you think asset quality pressures have peaked in the next couple of quarters to provide much better asset quality or do you think the lag effect will continue to play out in FY13 as well?
A: Though the asset quality pressure has stabilised, it still depends on the overall economy.
Q: What are the capital requirements the current year and how much will the government be able to capitalise PSU Banks?
A: Presently, there is a provision of roughly Rs 15,000 crore for public sector banks. We would see the results of the banks in terms of the capital adequacy ratio they have reached as on March 31.
I must add the compliment that all banks have taken maximum effort in recovery of dues, NPAs and reduce the losses to improve the capital adequacy ratio. So, after this, the government is committed to provide any requirement of funding.
Q: The PSU banks have a commitment to follow Basel III norms and this which could make them a little more capital heavy than they are at the moment.
The RBI has put out a discussion paper on dynamic provisioning which when entails the need for at least 30 bps of capital and provisioning limit will have to be increased. This will mean that they will have lesser profit for capitalisation.
If that is the case, then this Rs 15,000 crore will be extremely inadequate both for Basel as well as for the dynamic provisioning and result in a consequent fall in profits?
A: Firstly, the RBI guidelines will come into effect from January 1, 2013 and there will be a timeline for PSU banks to upgrade. Secondly, the government is fully aware of the capital requirements and is internally working with the chairmen of key banks on a strategy. So the government will take a decision on the requirement for capitalisation.
Q: This time the government sought the help of LIC to provide capital to most of the banks. Will that continue as government’s resources are stretched?
A: No, that is not a fair comment because the government never asked LIC. Wherever the LIC is outside the regulatory limits of the Insurance Regulatory and Development Authority (IRDA), they have gone on commercial routes.
Now you can look at what rates they made investments and the current rates today. So I do not think everything that the LIC does in public sector is always being digested by the government.
Q: LIC provided capital for most PSU banks that needed capital from the government. Since it's a compelling coincidence, does it merit the conclusion that perhaps the finance ministry has requested the PSU banks to take funds from LIC?
A: No. Only for banks which have a capital requirement above 8%. The central government committed to is 8% and that has been met. The RBI mandated 6% but the government has been committed to 8%.
The only thing which government was supposed to also commit to is 58% but that is internal decision of the government. None of the banks, with capital requirements less than 8%, received money from the LIC. So for banks with less than 8% requirement, the government has given money directly.
Q: The requirement of Rs 15,000 crore seems inadequate. If you remember, last year even to get to that 8% the SBI required about Rs 8,000 crore and it was with great difficulty that the government could manage that.
It's quite possible that the SBI will need yet another Rs 8,000 crore this year to fund growth, Basel III norms, and to cushion provisioning requirements which have been reducing profits. So do you think Rs 15,000 crore is adequate at all? What are the upper limits under discussion?
A: At this stage, it may not be appropriate to conjecture. As I said, let the results be out in a month's time. A fairly good picture would emerge and then the government will have to take a call to provide that capital. We stand committed to provide capital to banks. that’s all I can assure you.
Q: What are your thoughts on the liquidity situation? We have had the MSF (Marginal Standing Facility) limit being raised by the RBI by 2%. Do you think that removes the possibility of a CRR cut in the near term? Is the liquidity situation comfortable now? Do you see the yield curve steepening a bit after the actions taken by the RBI?
A: That’s strictly in the domain of the RBI. The government has informal interaction but it’s for the RBI to take a call. It is the best judge of whether it wants to further cut CRR or not.
Q: Do you think the liquidity situation in the market is comfortable?
A: No. It is in the range of comfort. But it can always change depending on economic growth and I think RBI is very sensitive to that. So we must respect the RBI’s proactiveness.
Q: Is there any internal assessment on what kind quantum of bad-loan increases that might come in? Do you expect the next quarter to be difficult for the banking sector?
A: According to the government’s assessment, bad loans have increased for some banks. But surprisingly in other banks, bad loans have declined. Perhaps it also depends on the management by the banks themselves.
But we do not expect any major change above 3%-3.2% NPA (non performing assets). The government does not expect anything alarming. But yes there is pressure which pressure will remain because the whole economy across the globe is passing through a difficult phase.
Q: The finance ministry is looking at freeing the NBFCs from the Moneylender’s Act and allowing them to recover their debts. Is it true?
A: The government has received presentations and is in consultation with the RBI. Only on the opinion of the RBI and the key regulator of the indices, can a call can be taken. I don’t think I can say a ‘yes’ or ‘no’ on that.
Q: The RBI is troubled about NBFCs which are largely or solely into gold loans. Is that a concern the government shares and is the government separately working on rules or regulations for this sector?
A: No, this is totally the domain of the RBI. If the government has any view, it will always be shares with the RBI. It is strictly the domain of the RBI, from a prudential point of view, to tweak the regulatory framework.
Q: What is the latest on the MFI Bill? Is it likely to be passed or taken up by Parliament anytime soon?
A: The finance minister has committed the Budget and all those bills shall be placed in this session of the Parliament. Passing of a bill is a different process that might continue into the monsoon session. But the government intends to introduce all bills in this session.
Q: We have your word that the finance ministry is not directing banks on interest rates. Will it then be a decision that the bankers will have to take?
A: No, our communication is very clear. We only advise banks to decide on interest rate revision as early as possible keeping a CRR cut and repo cut in mind. The government has not asked them to reduce the rates. That’s very clear.
Q: A hedge fund that has taken Coal India to court for not working in the interest of minority shareholders. Are there any worries, discussions or papers within the finance ministry that something similar could occur for banks?
A: Priority sector lending is not the direction of the government, it is a direction of the regulator and that applies uniformly to all banks in India, including foreign banks.