Deposit rates just as important as lending rates: SBI

CNBC-TV18 had reported that an arm of country's largest lender State Bank of India was in the process of launching a large fund for investments in distressed assets, sources have told CNBC-TV18. The company is believed to be in talks with private equity player Warburg Pincus and two sovereign wealth funds from the Middle East to raise about USD 3 billion, sources say.Speaking to CNBC-TV18, VG Kannan, State Bank of India said the bank is in advanced talks to set up a stressed asset fund. RBI approvals have come and it will be a matter of weeks before the fund will be set up, he said, adding that the exact quantum of the fund is yet to be decided.He spoke on the liquidity scenario in the system saying it has improved from three months ago. However, outflows in three months will be a worry, he said.
The bank will have to worry about deposit rate not just the lending rate, he said, when asked about transmitting the rate cut to the customers.Below is the transcript of VG Kannan’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: One of the papers have reported that you are looking at a bad bank. Is that a plan?A: If you are referring to the newspaper reports this morning, there is no such decision taken and no decision has been taken on this direction. Possibly, they are interpreting the RBI’s permission to setting up of the stressed assets loan funds and the stressed asset equity fund and there is no such move to set up any bad bank as such.Latha: Can you update us on the stressed asset equity fund and the stressed asset loan fund? Approximately, what size may each of these funds be and how much will the banks contribute to each of these funds?A: The exact quantum will be decided depending on the stressed assets level. There is no cap on it though we expect a minimum of Rs 10,000 crore will be there in each of them, at least.In the first results of equity fund, equity is expected to be contributed by the various banks and each of them not holding beyond 5 percent and then up to 49 percent and then remaining is expected to come from National Investment and Infrastructure Fund (NIIF) and this put together is likely to be invested in a good quality stressed assets fund, which can be rebanked by inclusion of equity. Very clearly, this equity fund cannot be leveraged for the purpose of investment of equity. So, it is a pure equity coming into the fund and investors has to put it into the stressed assets fund.Sonia: So by when do you think this decision will be taken of the quantum of loans? You did mention a minimum of Rs 10,000 crore, but in terms of a timeline, by when will the decision be taken?A: We are in advanced talks. There are certain small legal issues and certain prior altercations being sought. Now that the main permission from the RBI has come, it should be a matter of weeks, before the entire thing gets set up and then we shall guide in time the specific policy which has to be handled and the process starts off quickly. Hopefully by the month end, we should have some action.Latha: I wanted your view on the monetary policy statement as well. The expectation is that the RBI could signal that it will reduce the inter-bank deficit even more. Probably bring it to zero, so that you may not have to borrow at the repo window at all. If indeed, the governor indicates anything at all, that he will reduce the deficit even further, do you expect yields to fall a lot, because from April to now, yields have not fallen a whole lot?A: Yields have come down to 7.5 levels, but since then from 7.47-7.48, there has not been room for further cuts as of now. And the liquidity situation though has improved as compare to what it was about 3-4 months ago, it is not coming off and there is the fear of the outflows in a couple of months, in three months down the line could be apprehension and in case that, there is some indication, that could be a boost saying that the bankers need not get worried. As to how they go about doing it, I would leave it to their judgement as to how they would come and get it.Sonia: If there are easier liquidity conditions announced, then would that enable the transmission of the earlier rate cuts and would that eventually help bring down bank lending rates further?A: You seem to be only concerned about the lending rates, but we do not seem to be concerned about the positives. So, do you not think that they being a major portion of the banks funding should also be impacted and with inflation not coming off, though it has come down over the last few years, there is some time before further cuts can be taken. But any liquidity improvements certainly enable them to further reduce the deposit rates.Latha: If I understood you right, what you are saying is that indications of positive liquidity or reducing the deficit will help, but in this market, the yields are not falling before 7.4 percent simply because of this big worry what will happen in September when Rs 2 lakh crore of deposits are pulled out. What would you want to hear from the RBI so that that fear goes out from the minds of bankers, big bankers like you and the market?A: As I told you, the sentiment has been positive in the last policy where they have said that the adequate liquidity will be maintained and any further statements to address this issue will be a positive for the bond market and also for the bankers. We expect the banks’ performance also to improve and with improvement in the performance of the banks on the stressed assets and the provisions, there could be a possibility of a rate cut.Latha: There is a possibility that the RBI will speak about bad loans and capital requirements. Is there any kind of tweaking or relaxation the RBI can offer at all?A: I would not like make any comments on this at the moment.Latha: What should the RBI say or do to bring yields below 7.4? That has been such a floor for the yields. It is just simply refusing to go below that. What does the RBI have to do?A: You cannot expect the RBI only to act on the bond market. It has got various factors to be examined. The inflation figures, the monsoon which is supposed to be quite normal, though I do not think it has become active in any parts of the country and these are the 2-3 factors which have to be seen. And of course the statements do not give you the confidence that they will not hike the rates. It will just say that by our scope for increasing.So, these 2-3 factors have to be considered by them and before they make a statement that they would provide security at a lower rate or even provide room for repo cut. Being data driven, they would like to look at this information.