More than 30 percent of Bank of Maharashtra's deposits are in interest-sensitive deposits, which come to more than Rs 1 crore, and unless the cost of deposits is increased, the bank may not be in a position to retain these deposits
CVR Rajendran, ED, Bank of Maharashtra feels it is necessary to hike base rates otherwise net interest margins (NIM) will come under pressure. Recently, Bank of Maharashtra increased its base rate by 25 basis points in a bid to pass on the additional costs that it is incurring due to liquidity pressures.
He further added, more than 30 percent of the bank's deposits are in interest-sensitive deposits, which come to more than Rs 1 crore, and unless the cost of deposits is increased, the bank may not be in a position to retain these deposits.
"So it becomes absolutely essential to increase deposit rates. So we have increased between 150-200 bps on various short-term slabs," he told CNBC-TV18.
On asset quality, he said that the entire banking sector is suffering. Bank of Maharashtra has about Rs 2,000 crore of CDR in the pipeline. So to that extent, additional provisions for CDR will have to be made and reduction in interest rate which is being offered. All this will have an impact on NIMs, Rajendran says.
Below is the verbatim transcript of CVR Rajendran's interview on CNBC-TV18
Q: You have increased base rate by 25 bps, but has that alleviated liquidity pressures or do you think that there is another hike which could possibly be on the offing?
A: It is not to alleviate liquidity pressure, as such it is to pass on the additional costs which we are incurring because of this liquidity pressure today. More than 30 percent of our deposits today are interest-sensitive deposits, which means more than Rs 1 crore and unless we increase the cost of deposits we may not be in a position to retain these deposits. So it becomes absolutely essential to increase deposit rates. So we have increased between 150-200 bps on various short-term slabs. Base rate is nothing but a cost-plus contract, so naturally this has to be passed onto customers.
Q: When you increase the base rate across the board rates will go up. Do you think that you could therefore land up in certain sensitive buckets like Small and Medium Enterprises (SME) with more Non-Performing Loans (NPL)? They are already down and out because of poor growth. This additional cost could mean higher NPLs?
A: 25 percent is too less to create an impact on margins at this point of time. It was 10.25 percent sometime back. The very bank has reduced the rates. There are very few banks that have reduced rates. Many banks have held back this interest rate reduction itself. They went ahead and reduced it. Now we feel that these liquidity measures are continuing for a longer time. So this is necessary to pass on to the customers otherwise our net interest margin (NIM) will be under pressure.
Q: We also had Sukthankar of HDFC Bank and he was saying that if the elevated level persists then more base rate hikes cannot be ruled out. Would you say that for yourself as well?
A: That is true for all of us if the same rates prevail. Today, the three months CD is growing at 11.30 percent and six months ED is growing at 11.30 percent, bulk deposit is growing at 10.10 percent. At this level I do not think that we maybe in a position to maintain this at this level if it continues. For the time being 10.25 percent should be okay.
Q: What is time being, 4 weeks, 6 weeks?
A: For next 2-3 months 30 percent of my deposits are maturing which I have taken into consideration, but if it goes beyond 3 months probably we may have to increase it again.
Q: What are the margins likely to be this year?
A: We are maintaining a NIM of around 3 percent. It may suffer a bit because cost of deposit has gone up. Still we are confident of maintaining between 2.90-3 percent.
Q: How would you be placed on asset quality then? Last quarter there was some pressure on asset quality, would it worsen?
A: True. Asset quality is suffering for the industry as a whole and many of the infrastructure companies are getting into Corporate Debt Restructuring (CDR) package and I have about Rs 2,000 crore of CDR in the pipeline. So to that extent, I have to make additional provision for CDR as well as reduction in the rate of interest which is being offered. It will have an impact on NIMs.
Q: Could you be a little precise in terms of how much provisioning might go up?
A: 3.75 percent is the provision requirement on this Rs 2,000 crore which I have to make.
Q: Can you put a number to NPLs? You have seen almost two-thirds of this quarter.
A: I cannot add a number to it at this present. We try our level best to reduce the NPAs till the last minute. NPAs are likely to go up. Agriculture is doing well. Agricultural loans maybe recovered, but this is not during this quarter. Harvest will come only in the next quarter, at that time agricultural loans maybe recovered. To that extent, there will be some relief for us, but still NPAs are likely to go up and come back in the last quarter.
Q: Last quarter there was a huge slippage in your provision coverage ratio (PCR). Where do you expect it to stabilise?
A: I do not see it as a huge provision. We had huge PCR as such. 83 percent was my PCR. No bank was having that kind of a PCR, then there is no need to maintain it also. Last time it had come to 75 percent. Our effort is to maintain it above 70 percent for the current quarter also.
Q: We just got the news from RBI that they have increased interest subvention for export loans to 3 percent. Are you seeing that as attractive enough for exporters? Will they bite?
A: Certainly, for exporters it will be an attractive one, but it does not increase exports tomorrow. The cost calculations will make some difference and they will be in a position to take it forward.
Q: The last time we had spoken, you had mentioned that credit growth will be 15-16 percent for the bank this year. Is there any change on that target?
A: As of now we are growing at much, much larger level than that. Only thing is I am expecting a tapering in credit growth in the second half of the year.
Q: Which sectors would you be most comfortable lending to?
A: Only the personal segment now, retail segment. We are trying to reduce our portfolio in the corporate segment and trying to increase our retail portfolio at this point of time.
Q: We hear of job losses all over the place and this first hit of Equated Monthly Installments (EMI) going up and as you and Mr. Sukthankar said this is not the last of the EMI going up. Could retail also come under pressure?
A: It may not come to that level of corporate portfolio today. The corporate portfolio is very big and if they go into CDR the impact is much, much larger. For individuals, we take loan-to-asset provisions and their repayment capacities are taken into consideration at the time of deciding. Even if it slips a bit it is not a major challenge for us to recover the amount.
Q: Which is the sector where this tipping of big loans can happen where they have not yet come into CDR or into unilateral restructuring. Which is the sector that you are more worried about?
A: All infrastructure - power, road. Every infrastructure company is having tremendous amount of stress. I am afraid the entire portfolio may go for a hit.
Q: Have you stopped incremental lending?
A: To a very large extent we have stopped. We are very selective in lending to infrastructure.