MSF cut to aid banks dependent on bulk funds: Federal Bk

The impact on cost of funds because of marginal standing facility rate cut by 50 basis points yesterday would depend from bank to bank, says Ashutosh Khajuria, President – Treasury at Federal Bank. He feels the impact would be more on those banks that are dependent more on bulk funds.

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He says as a bank it is neither very aggressive on credit growth, nor is it lagging. As far as base rate goes, he feels by keeping it at 10.45, the bank is quite close to the market median. Below is the verbatim transcript of Ashutosh Khajuria's interview on CNBC-TV18 Q: How much of the marginal standing facility (MSF) window are you using currently and what will be the impact on your cost of funds because of this cut that we have seen in MSF rates overnight?
A: That varies. There is no fix number as MSF is there to meet the frictional liquidity conditions or so because it has replaced the liquidity adjustment facility (LAF). Once LAF has been capped at 0.5 percent of net demand and time liability (NDTL) of individual banks, sometimes you don’t go to MSF window at all.
At times, you go there but I think during middle September when advance tax payment of about Rs 65,000-70,000 crore had gone out of the system and it was just parked with Reserve Bank of India (RBI) and credit balances of government of India, I think system was quite short of it and so were most of the banks, including ours.
A big relief came when the first cut was introduced. In a calibrated manner RBI first brought it down by 75 bps and in second tranche it further brought it down by 50 bps yesterday. It is a welcome move because the days you go for MSF drawing, it gives you a relief to that extent. I think the impact would be more on those banks who were dependent more on bulk funds. Q: How much of an easing have you seen or will you see in short-term rates because of the MSF cut now by 50 bps?
A: Every calendar quarter end you have the cycle where on 15 month, the money is drawn out from the system and then the government takes about two-three weeks. So within 14-20 days, you get the money back when government starts spending and the same thing has happened now. We are in the first week of October. Yesterday was the day when this excise payments, CBEC payments are required on 7th of the month or so. You had your excise and services tax being paid.
There would have been some drawl again but normally the big chunk comes on September 15 and December 15 and also on March 15 because the first tranche on June 15 was a smaller one, it is only 15 percent of your projected picks outflow. These two September and December ones are larger - 30 percent each. So as a result of that there was a liquidity crunch and unfortunately, this year 15 fell on Sunday. So on 14 which was a Saturday, not full fledged money market operations are there on that day. You have your LAF window closed, you have your MSF closed and all. So on September 14, Call money rate went through the roof and they did breach 55 percent also but fortunately I think RBI came out with MSF window on that day and it cooled the market.
So from 55 odd percent, it went down to its normal levels but then when it comes down by MSF rate itself is cut by 50 bps certainly brings cheers to the market and it is reflected in bond markets, you will see 10-year is quoting below 8.50 and all. So I think system is feeling the relief. Q: For the bank in particular, how is credit growth ahead of the festive season anticipated to be and could you pass on any relief in terms of maybe lending rate cuts to your customers?
A: We are more at a median of the system as a whole. We are neither very aggressive on the credit growth side, nor are we lagging behind or so. So we are at the average representative rate of all scheduled commercial banks as regards passing on the relief. I would simply say we have not checked up our base rate for quite some time. So it is at 10.45 or so when liquidity was very tight, there were a couple of banks who did raise their base rates, we did not do that. So I think now it evens out. We will watch the market, we will see how other competitors are faring. I think by keeping it at 10.45, we are quite close to the market median there also. It may not be as aggressive as maybe the largest bank or so.