Costs of deposits bound to rise: PNB

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Costs of deposits bound to rise: PNB

CMD at Punjab National Bank, SC Gupta says that the banking sector has been in news because inflation is an important concern for both fiscal and monetary authorities.

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CMD at Punjab National Bank , SC Gupta says that the banking sector has been in news because inflation is an important concern for both fiscal and monetary authorities.

According to him, the cost of deposits is bound to rise. Banks will sit down and decide through their asset liability committee meeting as to how to adjust their portfolio on the deposits and lending side.

He also informs that PNB still has the board approval for 25 bps PLR hike, and is insulated till 7.72% on bond portfolio.

Excerpts from CNBC-TV18's exclusive interview with SC Gupta:

Q: Will lending rates go up now? Will this be across the board and how much would it go up by you think?

A: For the last 3-4 months we are in the news because inflation is one area which is causing lot of concern both to the fiscal authorities and the monetary authorities. Our RBI Governor in the month of April while announcing policy had projected inflation to be kept between 5-5.5% but then it breached first to the level of 6.11% and then came down to 5.97% and again to 6.11% and now 6.58%. So two occasions - one on 8th December and now yesterday, the Governor thought to use the right weapon to hike CRR which was originally at 5-5.5% in the month of December in two tranch and now 5.5-6%.

As it is, I find that looking to the inflation; the liquidity, the credit growth taking place and which is also one area which is probably bothering our monetary authority and particularly RBI Governor is the credit is growing more than what they anticipated at the rate of 30-31%, so obviously I find that we will have pressure on the interest rate; deposit rate for last 2-3 months - short-term deposits between 3-6 months are not available even at 9.50%. Some of the banks are quoting even 9.75% and today with the hike in CRR to 6% to be effective from 17th February and 3rd March obviously the cost of deposit will go up as the deposits are growing at the rate of 22-23% and credit growing at the rate of 30%.

I am sure that all banks will have to sit down today to take a view through their asset liability committee meeting as to how to adjust their portfolio both on the deposits side and lending side. This will mean an across the board hike in lending rates, that is mean change in PLR. Punjab National Bank's PLR today is 11.75%, last time we went to the board to increase it by 50 bps, was permitted, but effectively we introduced hike by 25 bps from 11.50% to 11.75% effective January.

So we still have approval with us for another 25 bps, which today I will take a view as to how CRR hike is going to affect PNB on the front of liquidity, interest not available on the incremental portion to be kept with RBI in the shape of CRR and other costs, and then will take a view. But obviously one thing is visible that rate of interest on deposits and advances will go up and all banks will have to play cautiously up to 31st March because the time left is very limited now.

Q: What are you expecting on your net interest margins as a bank and what happens now to your bond portfolio?

A: This is another area because net interest margin so far PNB is concerned we are comfortably placed; for last 20 months I have been able to take a number of steps along with my members of the ALCO (Asset Liability Committee) committee and as a team attempted certain exercise by reducing cost of deposits and increasing levels of advances including yield on advances, so my bank's net interest margin which use to be 3.76% March 2005 stands hiked to 4.25% December 2006 and on that front we are comfortable.

But the main worry is that the incremental cost is huge and with the CRR hike in the month of December and now yesterday Governor announcing to increase it to 6%, obviously the 10-year yield and the 5-year yield the difference use to be 20-30 bps now it is just 5 bps and I am sure this will also hit security portfolio of particularly all banks without an exception and PNB will also have some worry on that front which will have to calculate and see how my overall profitability by end of March if rate of interest and inflation continues at the present level will behave.

Q: Till what yield level on the benchmark bond are you hedged right now and above which you start hurting much more on the treasury portfolio?

A: My bank is insulated upto 7.72 - 7.73% and the benefit of reduction and duration, which we deliberately attempted during last 1-2 years, the benefit of which should have accrued to us is not there because on the shorter-term I find that the gap is reducing and 25-30 bps, which use between 5-10 years, is now 5-7 bps.