No risk to long term, base rates; CD, CP rates to rise: SBI

With the Reserve Bank (RBI) further looking to reduce money flow in the system by sucking out Rs 22,000 crore through cash management bills every Monday, short-term borrowing rates are likely to go up, says Pratip Chaudhuri, chairman of State Bank of India.

There was no threat to long term rates as most banks have held their long term paper in the held to maturity, or HTM, category, Chaudhuri told CNBC-TV18. Also Read: Lenders to auction KFA's Mumbai headquarters
He does not see base rates rising right away. He says commercial paper (CP) market and the certificates of deposit (CD), which were earlier in the range of 8-9 percent, would certainly move beyond the cut-off in the RBI auction of short-term paper.
The classification for raising rates is not along public sector or private sector lines. It would depend on who is at the short end of the curve, whose maturities are coming up, they would be required to raise rates, Chaudhuri says. Below is the verbatim transcript of Pratip Chaudhuri’s interview on CNBC-TV18 Q: This is a further tightening measure. We already saw some of the private sector banks raising base rates. Do you think now other private sector banks will follow and what about public sector banks like yourselves?
A: I would not think the base rates will go up right away but what will go up right away is the short-term rates. So, the commercial paper (CP) market and the certificates of deposit (CD) market pricing, which was earlier in the range of 8 percent or 9 percent would certainly move beyond the cut-off in the RBI auction of the short-term paper. Q: How else will you read this development from the RBI? Are you now getting a sense that this is here to stay for the next four-six weeks, which means the September quarter could see perhaps mark-to-market losses and other collateral damage for banks?
A: Not particularly because the thing to be noticed is that it is the short-term rates which are going up and the curve is becoming inverse at the long end. So the long-term rates are still between 8.2-8.3 percent. Most of the banks have packed their long-term paper into the HTM category. So I would not be too worried on that account.
What would be more worrisome is the expensiveness and possibly non availability of short-term liquidity because if the government starts borrowing at 11-11.5 percent then the banks will have to borrow at slightly higher rates and corporates will have to pay still higher. So therefore the portents for corporate borrowing short-term would become extremely expensive.
_PAGEBREAK_ Q: So far none of these measures have worked to sort of curb the fall in the rupee, do you think this latest measure will help stem the fall in the rupee now?
A: It is difficult to conclude like that because RBI view could be that had we not taken the measures, the rupee would have fallen more. So in a way the rupee has been held back to some extent by these measures. Q: I take your point that maybe public sector lenders like yourselves can hold out for longer and not move your base rates but do you think it will be more imminent for private sector lenders and at least some public sector banks especially those who are dependent on wholesale deposits as you point out, CD rates will go to 11.5-12 percent?
A: I think the divide is not along the public sector and private sector lines. The divide is along those who rely on wholesale funding and to what extent. If a bank is having 25 percent reliance on wholesale funding that can be vulnerable. If a bank has 10 percent reliance on wholesale funding, it is less vulnerable and a bank like us with zero reliance on wholesale funding will be still less vulnerable.
It depends on what amount of the CDs are coming up for redemption in the next two-four weeks. Q: How long can you hold out, how long can public sector lenders like yourselves who are not dependent on wholesale funding also hold out? After all short-term as you pointed money market rates have risen, you maybe pushed sooner or later to increase your short-term deposit rates?
A: That is another matter, but first, I think we take you back to your argument that when RBI dropped the repo rate, you led a clamor for dropping the base rates. We always pointed out that the short-term rates and base rates are not that closely interconnected. Similarly, when short-term rates have gone up, the banks are not raising the base rates and the people who are asking for a reduction in base rate then are surprisingly not asking for increasing the base rate now.
The thing is that yes, it depends how long one can hold on. But you are right that if short-term government rates go up, in sympathy or in sync, all rates have to go up. Q: There is some news that SBICAP Securities (SBICAPS) has taken possession of a Kingfisher house, can you give us any update on that and what will be the process going ahead, will Kingfisher house be auctioned now?
A: SBICAPS was appointed as the security agent by the group of lenders. We had served a notice and there is a waiting period that after serving a notice under Section 32 of the Securitization Act, you have to give them about two months time for them to come up with an offer. So now that has not happened, we have taken symbolic position and now the sale process would go on. Q: How long may the public sector banks hold out? For the first round of tightening we met you at the credit policy and you said SBI will have no problem holding out for two-three weeks, now this is extending to perhaps two months. So you think public sector banks will have to - by September at least – raise rates?
A: It is not classification along public sector or private sector lines. It would depend on who is at the short end of the curve, whose maturities are coming up, they would be required to raise rates.
But in a way, it has been good for us that we are lenders in this market. So if 11.5 percent or 11 percent happens, we lend in that market, but it will be difficult for borrowers because if I can get 11-11.5 percent in risk-free return, why should I lend in the loan market at 10-10.5 percent?