Karnataka Bank retains FY12 advances growth guidance at 25%

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The Reserve Bank of India's (RBI) recent move to free rates on non-resident deposits (NRE) triggered rate war amongst banks.

P Jayarama Bhat, managing director, Karnataka Bank in an interview to CNBC-TV18 said that raising one year return on NRE deposits is aimed at increasing NRE deposits and this will not have an impact on the net interest margins (NIMs) of the bank.

"As of now we have only 2-3% base of NRE FD accounts. We thought it is fit to increase the domestic term deposit rates, so that we can attract lot of NRE deposits," he added.

Further, the bank had guided to post 25% growth in advances in FY12 and it maintains the same. "We are giving interest on retail advances and there is a robust increase in the retail advances growth," he explained.

Below is the edited transcript of Bhat's interview with CNBC-TV18. Also watch the accompanying video.

Q: What is with this, you are almost paying 10% for one year money and hiked from less than 4%. How much can this impact your margins you think?

A: As RBI has deregulated this NRE interest rate and we have a very low base of NRE deposits that made us to hike this interest rates on NRE deposits. As of now we have only 2-3% base of NRE FD accounts. We thought its fit to increase the domestic term deposit rates, so that we can attract lot of NRE deposits. This is our quest for increasing the resources.

Q: In the bargain did you raise the one year domestic rate as well or was the one year rate always at 9.75%?

A: One year interest rates were at 9.75% since the last six months, we have not increased that.

Q: A few weeks back you also increased your savings rates to 5%. In these few weeks have you seen any impact, have you been able to increase and if yes, how much have you been able to increase your savings account?

A: This interest rates has been hiked since last 19th, only one week back. The inquiries are good and the response is quite good. We are also conducting a CASA campaign and this adds into it. There are lot of inquires, more so in the case of NRE deposits from abroad. This surely will raise our resources and we can arbitrate on this resources and make some good profit.

Q: So this comes down to what happens to your margins. Your net interest margins last were at 2.3%. How much do you think it could go down to?

A: No, it will not affect the net interest margin because as it is our operating profit last quarter went up by about 58%. This will not have an impact. We are increasing the CASA, CASA now we are giving only interest rate of 5% and whatever 1% hike we have given is increase our CASA pool considerably, and definitely we can make leverage or arbitrage on this money.

Q: The last time we had spoken with you, you said that you are eying a 25% growth in advances this fiscal. There has been a serious slowdown in disburses that at least the other banks have pointed out to. Do you think you would be able to manage this 25% growth?

A: Yes, we have still kept our guidance at 25% because we are giving interest on retail advances and there is a robust increase in the retail advances growth. It is of the order of around 35-40% and this should really increase our advances portfolio.

Q: I am still not able to understand why you are saying your margins won't be impacted. It may not be impacted much, but you are paying a little more for your NRE deposits, the incremental money that will come, you are also paying more for the incremental savings deposits that you hope will come, it only one week old, so you are not sure, but whatever it is, it's going to only increase your cost, isn't it?

A: We are set for this one year interest rate to deposit at 9.75% and we have not increased it. Yes, we are taking as if it we are getting inflow of our domestic term deposits only.

Q: Your savings deposit definitely becomes a little more expensive?

A: Yes, this is expensive, but as we are expecting a robust increase in the CASA, this will offset the cost and also we have also increased our PLR by 0.25% with an immediate effect.

Q: That's from today?

A: From 15.75% to 16% from the same date.

Q: That is from yesterday, the day your NRE deposits kicked in?

A: No, from the day of our savings interest rate increase.

Q: Okay, so that from 19th December?

A: Yes.

Q: The point is, banker after banker keeps telling us that there is not much demand for fresh cash, but what they are disbursing is sanctions made sometime earlier. Are you not seeing a depletion of demand or atleast a decline in demand?

A: As I said I am increasing my retail growth and as such there may not be any liquidity surplus. We have some pipeline disbursals in the corporate levels, that should take care. We can surely take care of inflow of funds.

Q: I am just asking whether you will have enough demand?

A: Demand is there. In the retail sector definitely, demand has not decelerated. In the housing loan sector for our portfolio and for our customer base, we are getting very good demands. We can disburse this amount in this sector, definitely.

Q: The other question that we have was on the back of asset quality because you have been facing a lot of pressure over there. What is your exposure to stress sectors at this point in time and what kind of improvement if at all you are hoping to see in asset quality?

A: As far as the stress sector exposure goes, except power sector we dont have much exposure. In the transmission sector we are having exposure of Rs 200-300 crore. Otherwise, we don't have a much exposure there. Other sectors like any other delinquency area we have not entered into. We don't find any much delinquencies in this quarter.

Q: As a player in this market when do you think the big banks, the ICICIs and the SBIs will be moved into increasing their savings bank account? At the moment, we find only niche smaller players, area specific players like yourself, like Yes Bank and Kotak Bank using this instrument to try and get more retail deposits, but it's not made any impact on the big banks or on the overwhelming majority of the banking sector. When do you think even PSUs will have to toe your line?

A: We will have to wait and watch because it all depends on the CASA percentage levels. Our CASA percentage level is around 21%. So those banks which are having less CASA percentage levels surely will go fast and when they are above 40-45, they will not go that much fast.