Continue to see extreme liquidity tightness: SBI head

State Bank of India chairman Pratip Chaudhuri said extremely tight liquidity in the system prompted his bank to raise deposit and lending rates. In an interview to CNBC-TV18, he said the RBI’s measures in mid-July to shore up the rupee had reduced SBI’s liquidity cushion by around Rs 20,000 crore. He said the hike in rates was a pre-emptive step as he did not want to wait till the liquidity situation worsened further.

Chaudhuri does not expect the Marginal Standing Facility (MSF) to be reduced at today’s RBI policy review. The MSF had been raised to 10.25 percent in July, making funds costlier for banks seeking short term money.
Chaudhuri expects SBI’s net interest margins to be in the range of 3.55-3.60 percent. He said he has recommended to the RBI that it reduce Cash Reserve Ratio by 1 percentage point.
On non-performing loans, he said the situation was “challenging”. Below is the verbatim transcript of his interview on CNBC-YTV18 Q: You raised your base rates. Can you tell us how the margins will shape up in the current quarter? Is there going to be an improvement?
A: The margins are likely to be between 3.55 and 3.60 percent and that’s the guidance we have given. Q: What is the reason for raising. The expectation from the credit policy is that the marginal standing facility (MSF) rate, if anything may fall. Will not that reduce your cost of deposits? Why did you have to raise it just a few hours before the policy?
A: I am surprised you are asking this question because you have been a strong votary of monetary transmission and when the policy rates were lowered by 25 basis points, you were disappointed that we lowered our base rate by 5 bps. Now that the policy rates have gone up by 300 bps and we have waited two months to increase the base rates by 10 bps. Therefore, the logic is very much there for anybody to see. Q: The point is its two months later. Why did you have to do it one day earlier?
A: It is because every treasury has to look to its asset liability position. We cannot allow the situation to come to a brink. And it is not so much about price, it is about availability.
The amount of sucking away of liquidity that has happened, I can speak for SBI, USD 1billion of refinance to exports has been taken away that Rs 6000 crore, cash reserve ratio (CRR) has been increased effectively by half percent, so that is Rs 6,000 crore and 10.25 market stabilisation scheme (MSS) is as good or as bad as not been there. Therefore, we had excess liquidity of Rs 50,000-60,000 crore, we have drained it down to Rs 20,000 but I do not think we should wait till the precipice. So, we have acted in good time. Q: Do you expect that the MSF rate will be brought down today and if that happens, do you expect your costs to fall?
A: No, I do not think so because I have time and again said that our bank costs are not related to the MSF rate. If that were so, we should have increased our base rates not by 10 bps but by 300 bps.
So, bank deposits rates follow a different dynamics of deposit rates; bank lending rates are dependent more on deposit rates. Since we raised the deposit rates yesterday to stop a flight of deposit, we were compelled to increase the lending rates. So, our lending rate decision is more on the back of deposit rate than on the MSF rate. As far as MSF is concerned, we do not consider it exists. Q: On the policy as a whole are you expecting any tinkering of rates on the repo or on the CRR. What is your expectation today?
A: I think it is pointless building up expectation. We have made a recommendation that not the rates but reduce the CRR by 1 percent. So, we will take a look at the policy and then the Asset Liability Committee would meet on Monday and decide on further course of action, but right now there is extreme tightness in liquidity.
Last Saturday the call rates had moved up to more than 15 percent when RBI decided to introduce the liquidity adjustment facility (LAF) window. So, there is extreme tightness in liquidity and I am not so much focused on the price but more focused on availability. Q: There is quite a bit of debate on how much money will come in because foreign currency non-resident (FCNR) window has opened up. In your assessment, how much liquidity injection could we see?
A: I cannot speak for the industry, so when it happens it will be seen but right now our entire foreign currency non-resident (banks) FCNR (B) corpus of USD 3.8 billion is at work. It has been lent to companies like Shipping Corporation of India; they need to be funded in dollars because most of their operations are in dollar denominated. I do not think it responds so quickly and so heavily. Q: Are you not hawking products for FCNR (B)?
A: No. They are just about 10 million per week or something.
_PAGEBREAK_ Q: What about overseas bond. You are not interested in raising money and swapping it below market rates with the RBI?
A: No, you cannot do that for banks which have foreign offices. In most of the jurisdiction there are very strong rules for upstream lending. If you raise bonds, you have to deploy it for assets in those countries.
Those assets could be an Indian Oil or Reliance or Bharti or NTPC, but you cannot send it back home, which is called upstream lending. I do not think we should even talk about it. Q: This time you affected a nominal base rate hike of 10 bps but do you think that there could be more rate hikes in the system not just by SBI but other banks as well?
A: System, I cannot say because we are experiencing what is called a bit of winner's curse because we had a base rate of 9.70 and everybody else was at 10-10.25. So, the entire corporate demand has descended on us. Plus the commercial paper (CP) markets are closed; the external commercial borrowing (ECB) markets are almost very low in volumes. So, the whole demand has migrated to the rupee counter and that is why we are experiencing very strong demand but not enough availability.
In fact whatever big ticket requests are there, we are telling them to defer disbursal. We may sanction but not be able to release this much of facilities till the liquidity improves. Q: Any assessment of how the non-performing loans (NPL) situation may pan out this quarter. Last quarter it was 19 percent uptick in the gross NPL, this time?
A: The situation remains challenging but it would be known exactly in September and December because most of the companies, you do not know which tips-off when.