Change in cost of funds to happen gradually: HDFC Bank

Country’s second largest private sector lender HDFC Bank has raised benchmark lending rate by 0.2 percent, a move which will make auto, corporate and other loans linked with base rate or the minimum lending rate costlier.

Speaking to CNBC-TV18 on the same, Paresh Sukthankar, executive director, HDFC Bank says that a marginal increase of 0.2 percent in the lending rates is because Reserve Bank of India has not been cutting cash reserve ratio since past 2-3 quarters.

Short-term deposit rates that use to be at maybe 7-7.25 percent have now moved to 8.25-8.50 percent, clearly reflecting the short-term liquidity or tightness in the market, he added.

Furthermore unless there is a change in the expectation of interest rates on a slightly longer term basis, there will not be any further increase in deposit rates. "If you do not see further increase in deposit rates then you will not see a further change in base rates either,” he adds.

Also, he adds that since the bank funds its loan book from deposits, the change in cost of funds and change in deposit rates happens over a period of time.

Below is the verbatim transcript of Paresh Sukthankar's interview on CNBC-TV18

Q: Can you elaborate on the increase in the base rate?

A: For every bank the base rate calculation is a set formula which has been put in place some years back when the base rate regime came into place. One of the key inputs in the base rate calculations are certain deposit rates. In the last couple of weeks, short-term deposit rates have clearly gone up and as a result the calculation throws up for us a base rate increase from 9.6 percent to 9.8 percent.

Also, at 9.8 percent after the increase, our base rate is till amongst the lowest in the banking industry.

Our base rate has been much more reflective of changes in interest rates, much more sensitive and better transmission of deposit rates to lending rates because in the last six months, from December and March quarter, we were one of the few banks that actually reduced base rates by 10 bps a quarter because at that point of time you had some cash reserve ratio (CRR) cuts and some slightly lower deposit rates as well. So, this increase has to be seen in light of what has happened in the last 2-3 quarters. We have gone from 9.8 percent to 9.6 percent and are back to where we were roughly 7-8 months back.

Q: What about the cost of funds?

A: It has not been a very sharp increase because the change in deposit rates would impact deposit costs on the margin, in terms of incremental deposits and whatever deposits on maturity gets re-priced. Since we fund our loan book from deposits, the change in cost of funds and change in deposit rates happens over a period of time.

If you look at short-term market rates, whether it is the money market rates or call rates, all those have clearly reflected what the liquidity measures have impacted and that is a very small component of the overall borrowing pool.

Q: Is there a possibility of a higher base rate?

A: It will not increase unless you have a further increase in deposit rates or if there is a change in the drag you incurred because of reserve requirements. At this point of time you have seen that there is no change in long-term deposit rates.

The short-term deposit rates that use to be at maybe 7-7.25 percent have now moved to 8.25-8.50 percent, clearly reflecting the short-term liquidity or tightness in the market. Unless you have a change in the expectation of interest rates on a slightly longer term basis, which is not our expectation at this point in time, unless you see that changing, I do not think you will see a further increase in deposit rates.

If you do not see further increase in deposit rates then you will not see a further change in base rates either.