Interest rates to continue to be stable: BoB

Inflation numbers are ticking in week after week. Fairly high week on week inflation jumps although of course nearer terms, it’s still a negative number. What does all this mean for the banking sector in terms of interest rates, in terms of growth? MD Mallya, CMD of Bank of Baroda , told CNBC-TV18 that liquidity flows continue to be strong and interest rates would be stable. “We expect 20% credit growth in FY10 despite bad H1,” Mallya said, adding that the cost of deposits will come down hence there was no reason for interest rates to harden.

Here is a verbatim transcript of an exclusive interview with MD Mallya on CNBC-TV18. Also watch the accompanying video.

Q: While we see an uptick in inflation numbers credit offtake even for the month of August has actually seen a contraction by Rs 5,000 crore. How do you see interest rates panning out in this scenario – one from the policymaker, the Reserve Bank of India (RBI) and two from the bankers themselves? Will you see hardening of rates at all?

A: As far as the interest rates are concerned by and large on the lending front they have remained almost range bound maybe there would have been a slight contraction as far as the prime lending rate (PLR) is concerned. Secondly, maybe in the sub-PLR segment what the banks have been lending maybe slight correction would have happen in the recent months. Otherwise the liquidity remains quite strong in the system, credit demand has not been coming in, we had expected maybe a slight pickup in credit in the month of August, it has not happen and therefore we are still awaiting the real surge in demand as the busy season picks up maybe by the end of September or early October, one perhaps could still expect reasonable amount of credit demand coming in the system. Therefore overall I would say for the current year if you look at it maybe up to March the overall guidance which RBI have been talking about around 20% of credit growth, I think still we are on track with that though the first half has been very poor in terms of credit offtake. Coming back to the interest point, interest rate scenario, I do agree that the bond sharply risen in the last couple of weeks again it was not entirely unexpected. We were expecting maybe by September end, the bond yields to firm up to around 7.5%, I think that’s what it looks to be at this point in time and maybe the appetite for bonds as we move forward when the credit pickup is seen could sharply come down.

Q: What’s your hunch, then, when do you think RBI will move its policy rates and when do you think bankers will start lending to corporate at a slightly higher price?

A: As far as the bankers are concerned, we are positive as far as lending is concerned, we are waiting for the real credit pickup to come. If I look at the sanctions maybe in the last six months or so, they have been quite strong, inline with what we have been doing in the past, and it’s only that the real deployment of credit has not been taking place. Look at some of the industrial segment; infrastructure for that matter, power and road projects. I think large sanctions have taken place in the last couple of months maybe as we move forward the deployment would take place once the financial closure is declared and the project starts implementing.

Q: My question was with cost of credit: do you expect that you will be charging more interest rate at all or at the moment you don’t see that happening?

A: My sense is that the cost of resources has reasonably come down in the last one quarter vis-ŕ-vis what use to happen in the first quarter. Lot of reprising has been taken place as far as deposits are concerned. The deposits which were taken in the Q1 and Q2 of the last year at high rates are getting reprised at lower rates maybe the differential is as high as about 2-3%. Therefore overall one would sense that the cost of deposit is likely to come down and therefore the ability of the banks to sustain or maybe slightly moderate the current lending rates could continue for some more time. It depends on as to how long the liquidity would continue to be so strong and therefore my sense is that at this point in time the interest rates could continue to be stable, there is no reason that the interest rates would go up beyond what it is today but what action RBI could take depends on quite a number of factors.

Q: Your perspective on the auto space and the real estate space, have you seen any significant pickup and sanctions and you spoke about 20% credit growth? To supply for this 20% credit growth your current account-savings account (CASA) has been taking a hit for the last couple of quarters. What’s your prognosis there? How you would be able to show up your CASA going forward and maintain such a high growth rate?

A: As far as the vehicle loans are concerned, we have seen substantial improvement in sanctions. On year on year basis perhaps the vehicle loan segment would have shown for the industry as a whole a growth of upwards 20%. If I look at my own portfolio in Bank of Baroda, the vehicle loan portfolio grew by almost 35% in the first four months. I think that’s a clear indication that the segment of vehicle loan has shown signs of revival and it may go forward. In the real estate space, look at the housing loan segment, housing loan demand has seen a sharp rise in the last three-four months. Here again industry wise one would have seen a growth of around 22-23% on an annualized basis. Even if I look at the numbers of Bank of Baroda, last four months the sanctions would have been more than about Rs 1,000 crore cumulatively and net of repayment which I would have received the portfolio has grown by more than about 700 crore which on an annualized basis on my portfolio size has grown by about 23-24% which in itself is better than what we had done in last year. Therefore it may not be appropriate to say that there is no credit pickup in all the segments; there are segments which have done well, there are segments where credit pickup has been seen.

Q: Would you say that in this quarter banks are likely to report lower other income but perhaps higher core income considering that even the mutual fund margins have been erased by Securities and Exchange Board of India’s (SEBI) new rules?

A: I think it’s quite possible for one reason that the treasury income would have sharply come down, the sort of interest rate scenario volatility which was there in the Q1 is no longer there. Second, maybe there could be a small number mark to market (MTM) provision which is required to be made by the banks which was not there; there was a write back in Q1. Therefore cumulatively on the treasury front it could be less, on the other fee based income the growth would be in terms of the growth which we had seen in the previous quarter.