Banks are likely to pass on rate cut by RBI: BOI

The Reserve Bank of India (RBI) announced annual monetary policy for 2012-13 today. It has cut repo rate by 50 basis points.

In an interview to CNBC-TV18, N Seshadri, executive director of Bank of India says, he doesn’t expect a material rate reduction in FY13. The street is not expecting more than 75 bps cut in FY13,” he adds. He further says, banks are likely to pass on token rate cut by RBI today. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: Are you in a position, given the market dynamics to pass the rate cut? A: Apparently ALCO will be met. There is no doubt it because it is just not on the asset side. We also look at the liability side to protect our net interest margins (NIMs). So, if I say not withstanding with what ALCO does I am going to do this, I think it is not fair and it is not correct also. There has been a discussion. There have been scenarios where the pros and cons of the rate cuts, and its impact on the entire balance sheet of the bank have been debated. It is fair that all the banks definitely would pass on this token rate cut because this is something which has been factored for quite sometime. I don’t see, at this point of time, any bank not working its base rate downwards, should there be a rate cut today. Q: So a cut in lending rates and in deposit rates because the interesting development, post the Budget was that many banks shows to start upping deposit rates as well. A: With inflation at check and with the rates moving down, the rate cut on the asset side should also follow with a rate cut in deposits also. Ofcourse there will be a lag which the banks will definitely be in a position to retain. But apparently there will be definitely a downward movement of deposit rates as well. Q: Banks have has a series of meetings with the RBI governor in the run up to this policy, what was the take away over there? Was it that this is an environment for the rest of this year where rates will generally be easing and that’s the stance that banks should take with the system as well or was it a very stop start kind of approach depending on what would happen with the macro economic environment? A: It would not be a discussion per se. It would be some sort of a feedback where banks would articulate their side and then the government as part of the policy may exercise would meet the various stakeholders and take inputs to decide on the overall policy statement. Definitely banks have articulated their other concern on slow growth and the tinting down of the pipeline in terms of investments, which is a matter of concern. Definitely banks have articulated that a softer interest rate regime would atleast create a sentiment in terms of growth. This is exactly the feedback what banks have been able to pass on to the governor. Q: It’s interesting that you used the phrase token rate cut. Is that your way of saying that you don’t expect a lot from the Reserve Bank over the next few months, this could be a one-off? A: No, definitely there will be a downward movement, but we don’t see a very significant rate happening in the whole fiscal. For example, the whole of 12-13 if there would be about 75-100 bps rate cut, I think that is something which the market would be quite happy to be with. Given the fiscal situation given the global situation and also the overall, I think the Governor’s hands are bit tied and a very aggressive interest rate cut in this fiscal is something which is very optimistic. But rate cut of about 75 bps in the whole of fiscal is something which the market is looking forward to. _PAGEBREAK_ Q: How much of an improvement in liquidity you have witnessed since the last month in March, when it was very tight? A: There has been some easing of liquidity. There is no doubt on that. At the moment, CRR cut is not really critical, although a 25 bps CRR cut is something which we can expect to make sure that the liquidity creates the right type of investment sentiment. That is not very critical and that can be done anytime, but I would vote for a 25 bps CRR cut along with 25 bps rate cut today. Q: As a banker what is it that you expect to see from yields and the levels that they trade at for the rest of this year? A: The market has already factored in 25 bps rate cut. This reversal in interest rate definitely would see softening of the yields. It all depends upon how the fiscal position moves, the governments borrowing position would fan out infact as it has been there. At the moment, a substantial softening of yield is not expected. The market has factored a 25 bps repo rate cut. I don’t see yield moving further should the rate cut happen today. Q: So, if we do get a 25 bps cut not just the base rate, would all kinds of lending rates come down by 25 bps you think on an early analysis? A: Yes, definitely on the retail side where there is growth happening, especially on the home loan there would definitely be a passing on the rate cut. In small and medium enterprise (SME) segment, which is again a very important segment from the view point of growth, you would definitely see rate cut happening on these sectors. With the deposit rates also going down on similar amount, there would definitely be corporate lending rate also going down. Yes, I would say it would affect most part of the lending of the banks balance sheets. Q: We didn’t speak since the Air India restructuring package happened. What did you make of it, since you do have exposure there? A: The restructuring package has been received and then time has been given till 30th of April for completion of the restructuring package. As we have discussed in detail, it is going to be a ‘win-win’ situation basically. The Air India gets a longer time in terms of repayment and there is a softening of the provision that banks are required to take on account of the special dispensation which the RBI has given. I think overall in fact the restructuring package has gone through well for both the borrowing and the lending sides.