YES Bank hikes base rate, says won't hurt credit growth

YES Bank, the country's fourth-largest private sector bank today announced a hike in its base rate by 25 bps to 10.75 percent in order to combat the rupee downturn. Speaking to CNBC-TV18 about its possible impact, CFO Rajat Monga says the hike will not affect the credit growth.

He says the base rate hike was accompanied by an increase in deposit rates. "Increase in base rate is more or less a balancing act between the deposit pricing and non-pricing," he adds.

Below is the verbatim transcript of Rajat Monga's interview on CNBC-TV18

Q: What is the rationale for the base rate increase that has affected the stock today?

A: The base rate increase is largely reflective of the fact that the deposit pricing has been nudged up at the shorter end of the yield curve going up to 9 months. So there is 25-50 basis points (bps) increase in deposit pricing for the retail customers. The base rate has to be correspondingly raised given its connection by the Reserve Bank of India’s (RBI) guidelines and board approved policies.

Q: What impact will this have on the credit growth and on asset quality given that many balance sheets are already under quite a bit of stress?

A: Credit growth currently in the system is expecting to grow around 14-16 percent. I do not think the credit growth overall is going to be impacted because most of the credit growth today is the maintenance growth variety as far as credit growth is concerned. The 25 bps increase is not a very sharp increase in any case. So credit quality cannot be judged by a base rate moving up by 25 bps. So it is a token increase in general to reflect the higher cost of deposits particularly in the retail segment given that we have raised the deposit rates. So it is more or less a balancing act between the deposit pricing and non-pricing.

Q: What would the differential be between your deposit rates and some of the key public sector undertaking (PSU) banks at this point?

A: The deposit rates are in a narrow range. In some buckets we might be 10-15 bps higher, in some it will be 10-15 bps lower, so, it will be a function of the asset liability management (ALM) profile of the respective banks and the buckets that want to raise more deposits on. There will also be a variety offers on senior citizen deposit rates. So, the overall rates will be broadly in a narrow range.

Q: A lot of bankers have found it difficult to point out that the measures introduced by the RBI were temporary at best, given the action on deposit and base rates, will it not be a temporary set up for banks?

A: We have to reflect the realities that the environment is presenting us and if the realities change, we will have to reflect them again.

So that doesn’t mean that the base rates can never be brought down or the deposit rates would not need to shift down. It is broadly a function of the environment. Banks are slowly raising deposit rates considering other peer banks as well.

Eventually, they will have to nudge base rates because banks have to review their base rates once every quarter. We too need to follow these guidelines and a bit of it is already in motion in the system.

Q: If measures are not unwound with the rupee at 61/USD and persist for another three months or so, would you need to harden rates even more?

A: At the moment, the rates are factoring the current RBI position and that is what the banks are adjusting to. It is difficult to guess if the RBI position will be tight or loose going forward. The next adjustment will be on the basis of what RBI does thereafter.

It is the cost of liquidity that RBI has raised and in the process money markets have been tightened. So, the current measures are suitably reflecting the RBI’s current stance. Rupee has been a little out of the stable range that it was over the last couple of days. Yesterday, the RBI seems to indicate that they are not targeting a fixed level on the rupee but are curbing volatility. We are on the lookout and as the environment changes, we will also have to respond to those changes.