Hiked rates due to RBI steps; base rate hike on hold: OBC

Oriental Bank of Commerce (OBC) decided to increase interest rates on some term deposits by 25 basis points (bps) to 8 percent on Tuesday. SL Bansal, chairman and managing director of OBC says that the step had to be taken primarily due to Reserve Bank's (RBI) liquidity tightening measures since mid-July. The bank has surplus liquidity, but very limited options to raise money due to caps imposed by the RBI forced it to hike the rates, he told CNBC-TV18.

The bank had earlier reversed its plan to increase its base rates. Speaking on the likely hikes in base rates going forward, he says that the lender will hold on to the base rates for another month or so. Everything depends on how the RBI and liquidity behaves from now, he adds. Also read: SBI at 4-yr low, brokerages cut target: How to trade it now Below is the edited transcript of his interview to CNBC-TV18. Q: What percentage of your deposit buckets are going to earn a higher interest? A: We were offering the rate of interest at 8.75 percent annually. We have raised it to 9 percent. Most of the banks are already offering 9 percent. Since we were comfortable on the deposit front, we were paying only 8.75 percent, lower than the banking industry. What warrants increasing it to 9 percent was primarily due to RBI’s caps on liquidity from July 15. In two tranches, the central bank put a cap on the liquidity. Even as of now, although I have a surplus security of Rs 5,000 crore and rose close to Rs 4,500 crore from the market. Since, they have put a cap of 0.5 percent of net demand and time liabilities (NDTL) more than Rs 900 crore could not be raised. And for the balance money, I have to market stabilisation scheme (MSS) or to the call market at 10.25 percent. I am not in a position to raise money at whatever rate. The rate of 7.25 percent was earlier there and I have to pay 10.25 percent; therefore it makes sense to raise deposits at some attractive rate. Q: This one year bucket occupies accounts for what part of your deposits? Does it account for 40-50-60 percent of your deposits and what will be the impact on Net Interest Margins (NIM)? A: Out of my total deposits of Rs 1.75 crore, if you exclude Current Account Savings Account (CASA) and bulk deposits, then around 60 percent is the retail term deposit. Out of this retail term deposit around 45 percent of the deposit comes in this one year bucket. One year bucket is Rs 70,000 crore. If 25 bps is increased, on a monthly basis close to Rs 6,000 crore matures. 25 bps over that close to Rs 15 crore hit initially, let us say it is not a big hit. Q: You had earlier reversed your plan to cut base rate and now this deposit rate hike. Any plan going forward to maybe raise the base rate itself? A: We are in a dynamic world. Today what I am saying may not hold true after three days. Everything depends on what steps RBI is taking and how the liquidity behaves. Everything is a function of liquidity. _PAGEBREAK_ Q: Would that be the sector's reaction as well that as there is a drying up of demand and perhaps RBI may not keep Marginal Standing Facility (MSF) at 10.25 percent too long; you do not expect base rates in the system to rise. A: It depends how long these steps will be there. Initially RBI indicated that these steps are for short-term period. Now already one month has gone. Q: How long can you hold out without pushing base rate? Can you hold out for another month? Pratip Chaudhuri had said at the time of the press conference that 2-3 weeks would not be a problem at all, as you indicated 2-3 weeks is up. A: For our bank we can hold onto our present base rate for another one month. Since we have not cut our base rates, we are at 10.25 percent. Some banks offer at either 10 or 10.25 percent. We can hold on for another one month if the RBI remains with these steps. Q: One month is an important time that you are indicating. In another 7 weeks or so, the quarter will end. If the quarter were to end with MSF at 10.25 percent, then the reverses on your MTM will be very high. You have a lot of long tenure bonds. Can you give us some idea how much are your long tenure bonds? A: It is very difficult to work out. It works on the security to security base and in any case RBI will look into our request and will grant this one-time exemption. Even if that is granted, the issue is larger. Last year we were sitting on huge profit, so most of the banks are comfortable that they will be in a position to use this profit for providing further provisioning. Even if the one-time exemption is granted, then at least depreciation is taken care of. However, profit will not be available. There are tough times ahead for the banks.