Base rate cuts soon; credit growth to remain soft: BoB

Latha: What is the situation likely to look now, do you think asset-liability committee (ALCOs) are slated to meet this week or maybe next week; you have a truncated week now, by next week will we get to hear any rate decisions?

A: I am sure that ALCOs will be meeting next week. It is important to see that despite the rate cut there has been no impact on yields. So, I am not quite sure whether you could expect rate cuts as soon as next week.

Going forward, the entire inflation regimen has become very benign with wholesale price index (WPI) becoming negative and consumer price index (CPI) also hovering around 5 percent.

So, I do believe that rate cuts are in order and going forward rate cuts will occur but whether they will occur in the next two or three weeks, I can’t say but they are inevitable; they will occur sooner rather than later.

Latha: When did you take your first deposit rate cut, wasn’t it sometime in October?

A: We took a deposit rate cut as far back as November. We have since seen that yields are softening but so far we are as yet holding on. As I said, we will take a decision sooner than later. Normally banks have not gone in for base rate cuts. I think sooner rather than later we will do so.

Latha: We could understand that in October-November banks were telling us that their historical cost of money will not fall so quickly and so they can only give deposit rate cuts immediately. However, now you have been with your deposit rate cuts for four-five months, you would have weeded out some of your high cost deposits therefore when the base rate cut comes how much might it be?

A: I would imagine that most base rate cuts would be of the order of 25 basis points. When we cut deposit rates they affect after a lag whereas if we cut advances rate they affect us immediately.

Having said that, you could see from the various statistics given out by the banks that their yields on advances have been consistently falling, for instance, borrowers who earlier were paying 11 percent are paying 10.5 percent or even base rates to many banks.

So, the bargaining power of borrowers has increased and in fact yield on advances has come down. It is not as if there is no rate cut, effectively for most banks there has been a rate cut. Formally when they would announce I would imagine a 25 basis rate cut would be in the offing.

Sonia: Credit growth has been very muted for the last three to four quarters, any chance of a revival anytime soon?

A: It doesn’t look like it. We were hoping that by this time there would be some revival in the credit demand but on the ground we are not seeing any signs. I am afraid that the whole cycle depends upon the revival of the economic activity. There is a lot of sound from various sources that the investment activity will put up; so far we have not witnessed any.

The Budget is good one, it is a very long range Budget. They are promising to build 1 lakh kilometers of road; they are promising to put up five power plants. With the coal auctions now in progress we hope that the entire gamut of stalled projects would finally take off.

So, I would imagine that over a period of time credit demand will pick up. However, I assume that it is still a couple of quarters down the road. It will take five to six more months, currently because if credit demand has to pickup people have to plan and by the time the credit applications reach the bank it will be still a few months down the line.

Latha: In the last credit policy on February 3, the Reserve bank of India (RBI) indicated that banks could differentially price deposits which people call back before their term is over and give a different price for deposits that are not callable. So, callable and non-callable time deposits were referred to, any progress on that?

A: It is under consideration. Normally, all our customers are essentially used to a regime of callable deposits. Essentially, whenever we issue a fixed deposit receipt, the general public understands that it is a callable receipt.

For non-callable receipt that is in the area of bulk deposits and probably when we do make such a move it will be for very large deposits. For the common man we would not enter into an arena – this particular area immediately. Maybe two or three months down the road after having studied the temperature we may issue such things at a differential interest.

Sonia: You said you don’t see any revival anytime soon but for Bank of Baroda itself what would the targets be say by the end of this year and in the first half of FY16 what kind of credit growth do you envisage?

A: Normally Bank of Baroda aims to go more than 2-3 percent above the market. However, the impact of non-performing assets has been so large that we have taken a conscious decision to grow more or less as per the industry. I think industry growth end of the year would be around 10 percent so we would be around that.

Latha: You said that rate cuts are inevitable and it is only a matter of time, should we expect then this month in March or wait for April and more importantly will that bring some relief to the NPL pressure as the cost of money falls will even historical borrowers have slightly less to pay in terms of interest cost and therefore you will see a fall in the pace of NPL growth?

A: I am afraid that the rate cut will have to my mind almost no impact on NPLs. They would definitely impact investors who like investing for the long-term. Benign interest rate regime is always good for investment but as far as non-performing loans are concerned I am afraid there would be almost no impact.

The non-performing loans are due to general economic slowdown, lack of demand, lack of pricing power, and competition from China. They are due to a host of other economic factors and I am afraid that 25 basis or even a 50 basis point cut would have much of an impact on NPLs.