Banks may start cutting base rates post CRR cut
Sep 18 2012, 19:51 | By CNBC-TV18
The Reserve Bank of India (RBI) on Monday kept the repo rate-the key policy rate-unchanged in its mid quarter monetary policy review, but cut cash reserve ratio (CRR) by 25 basis points to 4.50%.
RBI cuts CRR: How will it impact lending rates?
Below is the edited transcript of the interview on CNBC-TV18.
Q: Are you cutting rates?
Bansal: Yes, wait for some more days. We have already cut our rates with effect from August 16, wait for some more days.
Q: Will banks be cutting base rate or will it be piecemeal like only retail?
Bansal: I think this time the banks will cut rates. There has been 150 bps cut in CRR, 100 bps cut in SLR and 50 bps in repo rate. So, now, I think the banks will be motivated to cut the base rates. In the next 15 days, I think you will start hearing good news from the banks.
Q: Would you all be looking to reduce your base rate? How much liquidity has freed up for the bank in particular?
Kaul: There are two things. One, in some segments like home loans, car loans, education loans and some SME segments, we have already cut the rates. Because of the CRR cut, the short-term yield curve has come down. If it helps the banks to reduce overall cost of funds, banks could then consider cutting the base rate, depending upon the credit flow that we expect to take place.
I think certainly it will help the banks to re-examine the entire interest rate structure. With increase in liquidity, shorter end of the yield curve coming down, we have noticed that the cost of funds for the bank will certainly go down. So that would give leeway to the banks to consider cutting the other lending rates also.
Q: We understand on Thursday the Cabinet Committee on Economic Affairs (CCEA) is finally going to consider the package that they are looking at to improve the finances of power distribution companies. What is it that you have heard latest either from the government, your shareholder or from industry bodies like Indian Banks' Association (IBA)? What is the final contour of the package likely to look like?
Bansal: We have discussed this issue. Day before yesterday, we discussed with the Power Secretary of Haryana and this proposed restructuring will be on the same line. Fifty percent of our loan will be taken over by the state government. That will be funded by the bonds. And then we will go on funding some losses for the next two years, till the time the gap between the revenue and the cost is bridged. Then the rest of the things will fall in place. The important thing is to restore the health of these discoms. That will go long way in improving the asset quality of the banks also.
Q: How is it likely to impact UCO Bank? You will get state government bonds or do you get state government guarantee discom bonds?
Kaul: It is not clear as yet. But what is clear is part of the liabilities has to be taken over and be converted into bonds. Will the bank subscribe to those bonds or not? We are not sure about this. But, nevertheless, long-term viability of the discom is very important. It has to be maintained. Banks are supporting what best is to be done in terms of government policies.
Q: What it will mean to your own balance sheet and P/L? What will be the impact, if 50% do get converted into bonds issued by the discoms guaranteed by the state governments? Do you think they will find the market at all? Will you get any space cleared out?
Kaul: This is difficult to say right now. But we have certainly noticed in Air India, which is government guaranteed bonds, there is a fairly good market for those bonds.
Q: The central government guarantees are different. State government guarantees are not so far not been kept by the state government. Do you think a state government guarantee bond will find buyers?
Kaul: We will have to wait and see. I am not sure what are the interest rates offered. But we have seen in the past some of the state guaranteed bonds, which have very attractive coupons, did get some good buyers.
Q: What would fresh credit growth look like for the bank? How cautious are you going to be possibly to stress sectors, something like SEB, exposure to SEBs in terms of fresh lending or maybe a couple of these companies that have affected with regards to the coal scam that is recently come out?
Bansal: As regards with State Electricity Board, I think most of the banks have already made it very clear that unless the present loans are restructured properly and the banks' Net Present Value (NPV) is protected, they are not going to fund the further lending to SEBs.
As regards coal is concerned, some clarity has to come. And then the promoters have to come in and bring forward the proposals. What is the alternative source of energy available to them? Whether they are going for the imported coal or they are going to buy from the local market and whether there is any pass through effect is there, if there is an increase in the cost? All these things will evaluate, only when some clarity comes. It is too early to predict what is going to happen to which coal block.
Q: Is there any possibility that the state government bonds that maybe issued to you in place of the loans given to the discoms would have SLR status?
Bansal: No, I don't think. I think ministry is clear from the day one and the state government has already reached their Fiscal Responsibility and Budget Management (FRBM) targets, so they are not in a position to provide this SLR status. We understand from our discussions with the secretary of financial services and the secretaries of various state governments that we will be free to negotiate the rate of interest so that our NPV is protected. Once the NPV is protected guaranteed by state government, I think we will be left with you can say no option. Ultimately, we have to support the SEBs also. These assets are already on our books.
Once the state government takes all three steps, number one they give an assurance that there will be a regular upward revision in the tariff rate. Whatever the free electricity they are providing to the agriculture and other sector, they will be providing in the budget. Also, state government guarantee is available for the entire loan, entire loan whatever is in my books, whatever I am going to fund further. To that extent, the status of my loan goes up. I am comfortable to that extent.
Q: Could you just take us through what your current exposure to the SEBs would be? What sort of asset quality trends we can see in the current quarter?
Bansal: Our current exposure to SEB is about Rs 4,500 crore. Basically, we are lenders to Punjab, Haryana, Uttar Pradesh and Rajasthan. Out of that, except Punjab, all three loans have been restructured in our books. But once this restructuring package will be taken up by the central government then it will get a refinement and 50% of our existing loan will be taken over by the bond. I don't know who is going to subscribe to these bonds. Some clarity has to come.
Q: What about the Punjab SEB?
Bansal: They have given to E&Y. I think the study is going on. Maybe by December, this will be restructured. But they are servicing interest as and when falling due.
Q: How much is your exposure, as far as UCO Bank is concerned? If the state governments do takeover the loan, do you see some relief on provisioning because those loans are not on your books?
Kaul: Punjab, Haryana, UP and Rajasthan electricity boards, the total exposure would be in the region of almost Rs 5,000-5,500 crore or so. Except Punjab, others are restructured. We have tried to ensure that there is no net NAV loss to us. We have got the government guarantee for this.
Q: After those bonds are sold, will you get some relief on provisioning? This is question for across banks. Do you think if they are able to selloff the bonds there will be some provisioning that they don't have to make?
Kaul: No. We need to wait and see what type of bonds are these? Are these the bond issued with a corporation guarantee with the state government or these are bonds issued by the state government? What type of coupon is there? What is the marketability of these bonds? It is bit too early to say anything about this, till the whole thing emerges clearly. I think between the two, the bonds that are issued with the state government have better marketability compared to state government guaranteed bonds. So, we will have to wait and see the structure of the bonds, coupon of the bonds and tenure of the bonds.
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