Union Bk plans to reduce deposit rates to 7.5% by Feb

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MV Nair, CMD, Union Bank, said interest rate have to come down as there is a refinance window available from the Reserve Bank, which is available at 5.5% and no bank has accessed it. "Before you access you have to absorb the funds that you have. So, there is no reason why the interest rates should be high."

 

He said the bank plans to reduce deposit rates to 7.5% next month.

 

Here is a verbatim transcript of the exclusive interview with MV Nair on CNBC-TV18. Also watch the accompanying video.

 

Q: What did the Governor tell you? It was a good two and a half hour meeting. Was there a lot of pressure put on you'll to bring down rates?

 

A: The Governor did give the complete picture of how exactly the international scene is evolving and how the Indian scene is evolving, and some of the measures that have been put in place in the last three months and how it has impacted the Indian economy.

 

Q: The document is very clear that there is scope for banks to cut rates. Was that the big message?

 

A: One of the points discussed is there is a clear indication that interest rates should come down. But then there are issues on the ground because interest rates have come down. If you really look at the BPLR of public sector banks it has come down by 150 bps.

 

Q: But you'll are giving money to RBI at 4% and you 'll are giving to AAA corporates at over 10%. The gap is historically too high?

 

A: Actually the whole issue is unless your funding costs come down in an Indian situation where the operational cost is more than 2% and you have to provide for NPAs in such a situation, you have to factor this and only then can the lending rate be decided.

 

What has really happened is, you have to first get the deposit rate down. But deposit rates become sticky at 8% because of the alternate opportunity for saving available. So, that is one point that was discussed. Only when we are able to bring the deposit rate below 8% because there is an issue of small saving instruments.

 

Q: I take your point from the competition from the small savings. But basically what do you think the rates will be by the time February runs out and where do you see deposit rates at say by March end?

 

A: Interest rate has to come down. It will come down slowly for the simple reason that there is a refinance window available from the Reserve Bank; no bank has accessed it, which is available at 5.5%. But before you access you have to absorb the funds that you have.

 

So, there is no reason why the interest rates should be high. But it will happen over a period of time.

 

Q: In February do you think we could see 7.5% on deposit rates?

 

A: I think we are the first bank to reduce it to 8%.

 

Q: But will the industry come down to 7.5% by February?

 

A: I think Union Bank will reduce it to 7.5% next month.

 

Q: And by March end do you think even 7% is possible?

 

A: We may need to wait for some time because the interest rate coming down very frequently is also not very good in the sense it has to happen slowly.

 

Q: In terms of credit offtake clearly they have reduced the GDP from the 9% that we were seeing in April to 7% or maybe with a downward bias. So perhaps we may end up with 6.8-6.9%. If the situation for 2008-2009 is very dire, the Governor's own words are that a painful period is seen ahead. He is quite pessimistic about how a better part of 2009 will pan out. So, let's assume for arguments sake that growth comes down 6%, do you think the credit growth of banks is definitely slowing down? Do you think it is inevitable that you are going to see credit growth coming down to 20% and below at least in the first six months of FY10?

 

A: Normally if you see the quick numbers, in case you grow at about 8% or 9%, credit growth has been almost 28% in the last four years, when the GDP grew at 8.8%. So, it is about three times. Now 7% growth should get us about 21-22%, but then because alternative sources of funding are not available, to that extent, bank credit would be higher than the 21-22%.