Bank of Baroda to decide on cutting lending rate tomorrow

Post Reserve bank of India’s (RBI) deeper than expected repo rate cut on Tuesday, state-run Punjab National Bank and IDBI Bank announced cuts in their lending and deposit rates. On Thursday, ICICI Bank, the country's largest private sector lender, also lowered lending and deposit rates by 25 basis points each.

MD Mallya, chairman and managing director, Bank of Baroda told CNBC-TV18, they would take a decision on lending rate cut by tomorrow. However, the quantum of rate cut will depend on the overall liquidity position and cost of the funds.

"Going by what RBI has announced in terms of repo cut it is quite evident that we are seeing moderation as far as the interest rate scenario is concerned," he added.

Below is the edited transcript of Mallya’s interview with CNBC-TV18. Also watch the accompanying video.

Q: Has the bank taken a decision either with regards to what to do on your lending rates and whether or not to cut deposit rates as well?

A: No we would be taking a decision soon. The Asset Liability Management Committee (ALCO) has to meet and then take a call on that. But, going by what RBI has announced in terms of repo cut it is quite evident that we are seeing moderation as far as the interest rate scenario is concerned.

Q: Some of your peers have cut rates by 25 bps. Is it likely that you will also do a rate cut of that quantum and why is the transmission not full? From a 50 bps repo cut why are rates going down only 25 bps can you explain that to us?

A: As far as the RBI stance is concerned, it is quite clear that we are seeing a moderation in the interest rates, therefore it is quite evident that the transmission would take place. As far as the quantum of the rate cut, which banks are likely to do, depends on the overall cost of resources coming down.

Therefore, evidently the cost of deposits would also come down and then it will take some time and with the lag effect one could see the overall interest rate on the lending also coming down. To start with may be a 25 bps is what some of the banks have done yesterday. Once the real reduction in terms of cost of deposits is seen, one would look at the moderation of interest rates further if any. But it all depends on the overall cost of funds.

Q: I want to pick on that ‘if any’ because will your cost of deposits come down very much in this current scenario because the banking system has been struggling to get fresh deposits, other competing products seem to be doing better in terms of tax efficiency and return. In such a scenario do you think you can continuously lower your deposit rates enabling you to pass down in lending rates?

A: As far as last year is concerned because inflation was ruling high, the real interest rate to the customer was less or rather the banks had to price the deposit rates slightly higher. Now that we have seen a moderation in the inflation numbers and the liquidity overall in the system is likely to stabilize and quite comfortable, one could see the overall pressures as far as the deposits are concerned coming down. Therefore, one could look at the deposit rates also coming down significantly.

So that would give a comfort for the banks in terms of reduction in the overall cost of funds, which could be passed on to the customers. When we talk in terms of the overall reduction in the lending rates, we need to look at two things, one is the base rate per se where we are talking in terms of a cut of around 25 bps, but more importantly we need to see the spread over the base rate. Perhaps a contraction of that also could be seen as we move forward if the overall scenario is comfortable.

Q: We believe the State Bank of India (SBI) team will be meeting either later this evening or early next week to decide on what they want to do with rates. Is it possible that most banks are waiting for SBI to move and is it also possible that if SBI chooses to move by as much as 50 bps many banks will have to extend the amount of cuts they have announced?

A: As far as we are concerned, ALCO will meet either today or tomorrow and the decision will be taken in the current week itself. The quantum of rate cut will depend on the overall liquidity position of the individual bank and the overall cost of the funds they have.

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Q: Any truth to reports that the government or the finance ministry may have indicated to PSU banks either orally or in written communication in terms of how soon they should cut rates or what they should strive towards in terms of credit growth this year?

A: The government has clarified what they have meant in the clarification, which has been issued yesterday, I would not like to debate more on that.

Q: Just to take up that point that this year since inflation is coming down it gives you more elbow room to cut deposits. The reality is somewhat different. Households who are your depositors they don’t look at the WPI (Wholesale Price Index) inflation, the CPI (consumer price index) is 9.5% for March. If you offer 9% on your fixed deposits post tax at 6% in the hands of your depositors, 6% post tax income to cover CPI at 9.5% and you think that you are flexibility on lowering deposits?

A: But then the customers will also look at the other investing opportunities alternate investment opportunities which are available before taking a call.

Q: Let me tell you about the alternative investment opportunities. Public sector paper, government paper is offering 8% post tax, REC, IFRCL, NHAI, these are tax free bonds I am talking about. You go to any mutual fund the tax treatment is better. Every fixed income instrument post tax gives you more than 6% and I am assuming 9% fixed deposit rate. Where is the flexibility to lower your deposit rates?

A: One weighs different options also including the liquidity as far as the deposits are concerned but then look at the reality, post March we have seen the pressures as far as the rates of deposits are concerned has considerably come down. Even without the RBI rate cut, which has come in the last week the rates on deposits, especially the bulk deposits has also been coming down. Therefore, one cannot take an assumption that the rates of deposits would continue to rule high. There is a definite case as far as the reduction in the deposit rates is also concerned.

Q: Can PSU banks afford to take on the risk of hitting profitability in a situation where asset quality itself has been under threat? For your own bank there has been a surge in delinquency, you have had problems with regards to aviation companies etc. Is it not looking like a more tricky situation this year compared to the last?

A: When the economy has seen a sort of deceleration, obviously the stress on asset quality will be there. But the point to be noted is that whether the banks would be able to absorb and manage the credit cost. If you look at the NIMs (Net interest margin), the NIMs have been reasonably good, despite the pressure of the deposits which have been seen in the last one year.

Therefore, the overall operating surplus which the banks have been able to generate has been reasonably good. To my mind the banks have been resilient enough to absorb the credit cost comfortably, even if the overall delinquencies have seen an increase. I would still maintain that despite these stresses the overall situation looks to be rather comfortable. I don’t think that’s a great concern going forward.