With Reserve Bank of India (RBI) tweaking its liquidity risk management framework under Basel-III norms, Anshula Kant, CFO at State Bank of India thinks that it is a welcome move which has enlarged the pool of high quality liquid assets (HQLA).
Under the new framework, easier liquidity coverage ratio (LCR) rule has liberated a lot of money. Hence, SBI will now have to keep less money in government bonds, Kant added.
However, she also feels the action that will move the needle for SBI is the relaxation of outflows from 5% to 3% on contingent liabilities on letter of credit (LC) bank guarantee outstandings.
The revised framework has also slashed the inclusion of corporate debt securities (CDS) which are rated between A+ and BBB- in level 2B assets by 50%, which will benefit SBI, said Kant.
Like the rest of the market, SBI, too, expects a rate cut in April, adding it would be either a 25 basis point cut (bps) or a 50 bps cut.
Below is the verbatim transcript of Anshula Kant's interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.
Latha: Give us a word on this easier liquidity coverage ratio rules. Does that liberate a lot of money for you? Do you have to keep less money in government bonds because of Reserve Bank of India (RBI) tweaking the rules?
A: Yes, to some extent it does. The one, which will move the needle for us is the relaxation of outflow from 5 percent to 3 percent on the contingent liabilities on letter of credit (LC) bank guarantee outstanding. That will move the needle. Then there are some one-two other finer points, which talk about inclusion of corporate debt securities, which are rated between A+ and BBB- level where you have a 50 percent haircut. The fact is you don’t have too many commercial papers (CPs) or certificate of deposits (CDs) in that rating bracket. However, nevertheless it is a welcome move at least it will enlarge the pool of high quality liquid assets (HQLA).
The third thing which would make some impact would be the inclusion of securities that we buy in the reverse repo transactions that can be included in HQLA.
The other five-six points that are there in the circular are more in the nature of clarifications to some earlier guidelines, so I would say the three major changes that have been made.
Latha: That improves your margins for the next quarter?
A: I wouldn’t say -- it is such a big change. The big one came in February when they increased the fall liquidity coverage ratio (LCR) by 3 percentage points. That was the one which eased our liquidity crunch.
Reema: What will be the relief in your HQLA? Is there a way to quantify it? Would you have to keep lesser amount of money in the sense from 27 percent to 25 percent or something in government securities?
A: To the extent that the reduction of outflow of 2 percent are your letter of credit bank guarantees (LCBG) outstandings -- to that extent, when that outflow comes down, you have to keep less HQLA. So to that extent, your restrictions of perforce investing in HQLA comes down.
Latha: We just wanted to know is it one percent lower, is it 2 percent lower?
A: No, for us it would be about 2 percent lower.
Latha: Should we expect that coming April, rate cut is expected, what are your own expectations and more importantly what impact can we see in terms of deposit cuts and lending cuts from SBI?
A: As with the rest of the markets, we are expecting a rate cut too. Good case would be 50 bps otherwise 20 bps for sure. For us, if you look at it, we are way ahead of the market in terms of our deposit rate cuts. We are significantly lower. The most popular bucket we are at 7.25 percent whereas the rest of the banks are offering higher interest rates.
The other factor, which we will consider when we take a decision is that in the recent months, credit growth has outstripped the deposit growth. If you see this current quarter that is how it has been so far. So, we will take it into account when we take a call on our rates.
Latha: But marginal cost lending rate also kicks in on April 1 and then you have this huge PPF savings rate small savings rate cut and you had an inflation which was below expectation and one expects the RBI will also cut. So, given all this, you don’t think that there is further scope? One was thinking that a base rate cut is inevitable in April.
A: Marginal cost of funds lending rate (MCLR) and base rate are not apple-to-apple comparison, it is apple-to-orange comparison and how banks announce their MCLR will depend on the card rates that you are offering in the month of March as well as in which bucket you have how much deposits. That drives your cost of funds basically.
So you are right. In the sense that the general economic parameters are very conducive to benign interest rate scenario like you rightly said inflation is under control and credit growth is slow. So definitely the expectation is that it should be benign going forward. I was just mentioning vis-a-vis our bank specifically will have to see how the rest of the market players also pan out in terms of their deposit rate cuts. You compare the other bank one year to two years deposit rates, they are as much as 25-50 bps below us at the moment. So, we will see how it goes and let us see how the credit growth ends up on March 31.
Latha: How is it likely to end, credit growth for you?
A: Credit growth normally Q4 is fairly strong growth. It has not been as strong as it usually is in Q4 or as it was in Q3 but we are seeing some growth but in any case it is outstripping the deposit growth.
Latha: How would you expect margins next quarter to pan out, in a cutting rate scenario your margins normally are squeezed, would you expect margins to be less next quarter?
A: I think margins will remain little bit flat or downward pressure. The fact is what happens in the next rate cut in April whether we do it or not is one part of it but the fact is we have already cut our base rate by 70 bps and all the existing loans have been -- most of them we have 80 percent floating rates -- priced downwards. If you do it on a Y-o-Y comparison then certainly it will be lower than the previous year\\'s Q1. Sequentially it may be marginally lower but not significantly lower.
Latha: What will be the provisioning position for Q4 itself? In the results, SBI had indicated that you will take the asset quality review burden equally in both quarters but you have also done some very aggressive recovery. So is the provisioning burden likely to be as bad as Q3 or bigger?
A: We are so close to the quarter end that I wouldn’t like to comment on this. I stand by what we shared with you after Q3 results. I think on March 29, it would not be appropriate for me to comment on the provisioning.
Latha: Then if you can qualitatively comment, you have had these marathon meetings with stressed companies, are you getting an indication that there could be more sales of at least strategic debt restructuring (SDR) companies or perhaps the stronger recovery, has the message gone and is it showing in the numbers?
A: I think the message has gone very loud and clear. In the numbers it will surely start showing up in the next year onwards.