May tweak deposit rates once RBI clarifies steps: Andhra Bk

BA Prabhakar, CMD of Andhra Bank says that the bank will not raise deposit rates until there is further clarity on duration of the Reserve Bank of India's (RBI) measures. 

He told CNBC-TV18 that the decision on rates may be taken after RBI's monetary policy meet on July 30. The deposit rates are inching up already by 15-20 basis points (bps) and may rise later, he adds. The RBI on Tuesday reduced the limit of bank borrowing to the tune of 0.50 percent of its total deposits. It also hiked the daily average requirement of cash reserve ratio (CRR) from 70 to 99 percent. Speaking on the impact of such moves on banks, Prabhakar says he sees compression in margins for the second quarter. Investment in government securities initially and borrowings in short-term having gone up, margins will get impacted, he says. However, the impact on the bond portfolio was too early to be foreseen, he adds. Also read: Up-to-date with fund needs; won't hike rates: HDFC's Mistry Below is the edited transcript of his interview to CNBC-TV18. Q: Will you wait for July 30 and then hike deposit rates? A: We will have to see whether these measures are short-term or it is going to be there for long-term. We will know that in the policy statement on July 30. Therefore, once we have some sort of an indication from RBI as to where the rates are headed, the banks will start adjusting the deposit rates. Q: What is your definition of a short-term? What will the RBI have to indicate for you not to raise the deposit rates? A: The indication would be the policy rates. If they do not get changed, then the market will get the signal that probably these measures are going to be for a short-term. However, if the policy rates are going to be increased, then market gets a feeling that these measures may continue for a longer term. Then the bank will have to start augmenting their long-term resources to manage their liquidity issues. _PAGEBREAK_ Q: How much time will the banks give these measures? If they stick around for another four weeks, then will the deposit rates go up? Or will they go up even earlier? We have already seen two weeks of ten quarter and another two weeks is good enough. By August 15, will we see deposit rates starting to rise? A: Four to six weeks a reasonable time to expect these measures to be rolled back. If it doesn’t happen, the deposit rates will start going up. But it is already inching up, if not steep. We have already seen deposit rates going by about 15-20 bps as the market is getting prepared for augmenting liquidity through deposit. The reliance on the marginal standing facility (MSF) window will be too expensive. So, banks will start looking at alternative ways of rising liquidity. But four-six weeks is a reasonable time to wait and expect any modifications in these policies. Q: Credit demand has been muted and now you are expecting that interest rates could go up by 20-25 bps. What may we end the year with? There is one economist who has called for only a 10 percent loan growth in the current year? A: The 10 percent mark is a bit low. I expect at least about 13-14 percent of credit growth should happen. If the liquidity is going to be tough, then customer who have not been using the limits; even the customers might start accessing their unutilised limits. So, that itself can create some credit demand. So, it is a function of liquidity whether it is in their banking system or it is in the overall financial market, we will have to see that if the liquidity is comfortable. If the liquidity of not comfortable then there will be demand from the corporate sector for bank credit. Q: What is your expectation? Are you likely to see margin compression in the coming quarter? If yes, then how much and what will be the bond portfolio look like? Could you quantify the extent of mark to market (MTM) losses with bond yield now at 8.5 percent mark? A: The second quarter will have compression of margin as most of the banks in the absence of credit growth had invested in the government securities and now the refinancing or the access to liquidity against that has been limited to the extent of 0.5 percent of the net demand and time liabilities (NDTL). So, naturally the cost of borrowing, the short-term borrowing cost will go up. It will take some toll on the margins. But as far as the bond portfolio is concerned, let us wait and see because it’s too early to comment on that. We will have to see how the yields on the bond portfolio move because we still have another one and a half month to go before the Q2 ends. It would be too early for us to say what is likely to the impact of the bond portfolio on the profit and loss.