Q: The repo rate has already been reduced 150 bps since the start of October, if they are lowered another 100 bps –– 250 in total, do you think banks in the next three months will reduce lending rates at all or if they do that –– more than 50-75 bps on the lending side; what about on the deposit sides, given that deposit growth is also not terribly healthy at least for private banks?

A: At this point of time frankly the issue is not of asset growth but of liability management – I think that is critical from a bank’s perspective –– after all you have to fund asset growth. So the critical issue really is liability management and incremental credit deposit ratios in the banking system are uncomfortably high in certain cases.

So to that extent the focus clearly would be on what happens to the liability side, on the deposit side before you actually talk of asset growth but assuming hypothetical situation of 100 bps cut yes you would probably see a cut on compulsion about 50 bps but then the issue is where does one lend and what are the sectors that you would want to get exposed to?

There are also conflicting signals coming in. On one hand, you reduce the risk weightage on real estate and on the other you tighten the NPA (non-performing assets) norms of restructuring. At the same time you liberalize provisioning norms. So these are signals that are not terribly exciting to take a call on a sector or the market or the general economic situation.

So one needs to look at - are there bankable projects today which you would want to lend to –– would you rollover facilities to a particular sector? So it is not simply today a matter of how cost of deposits move or lending rates are going up and down. There are issues just sectoral in nature which would not let banks drop rates at this point of time or even lend.

So I am taking a conservative position on this and I have been doing so for the last six-eight months. I have been constantly saying this that it is not just a matter of easing liquidities and if we are in a situation of some strength today, it is largely because of certain level of provisioning, certain level of restructure that have already been put in place.

So it is today a bit of a situation where it is not necessarily linked to what the policy rates are. Going forward you will see a variation, increasing divergence between policy rates and market rates if policy rates drop further.

Q: You were talking about sectoral exposure: let me ask you a question on real estate which everybody sort of exercised with today. What have you made of this, the risk weightage reduction and now the talk of a rollback attracting the NPA clause? What is the bank’s stake on real estate sector today?

A: This is exactly what I was talking about –– that the signals we are getting are not quite in-line because (a) go ahead and drop risk weightage then you liberalise provisioning norms. So this makes it a worry and in some way it’s not a consistent set of policy that’s being frame and that can be detrimental to the banking sector itself. One feels that there is obviously a stress build up in the system; there is no doubt about that. It is partly sector related, partly company related but banks are exposed to sector and if you are sending five types of signals around this, then it is difficult to take a call on the sector per se.