The Reserve Bank of India’s decision to leave key policy rates unchanged at a recent meeting would result in a fair amount of portfolio gains for banks as bond yields softened after the announcement, Rakesh Sethi, Executive Director, Union Bank of India, said.
Other factors such as incoming FCNR funds would also result in higher margins, he added.
Here is the transcript of the interview.
Q: First your view on the bond markets itself, the unexpected non-hiking of interest rates has left yields much lower -- 8.7 percent on the 10-year. Do you think it is a given now that banks are going to find portfolio gains in the bond space for Q3?
A: Certainly, it will make a good impact on the profitability of banks. The increase of 25 bps or more than that was expected would have impacted the banks in a bad way on the treasury portfolio.
At the same time now if you look at the Marginal Standing Facility (MSF) borrowing rates, the utilization of funds is equally at a lower level which means that liquidity is available in the market and banks will be able to gain a bit on their profitability side due to this impact where the RBI has kept on hold the change in the repo rate.
Q: How does liquidity impact you - personally have more money because of cash infusion coming from the government? Secondly there has been this FCNR deposits as well which many banks have got, I would assume you would have got some too. How does all this liquidity translate into P&L gains, will you have an improvement in margins this time, how will it impact your P&L for Q3 in the first place?
A: Two or three things will come, raising on those FCNRB funds and converting into a swap. Certainly it is giving a margin of around 1 percent plus to the banks, that is a positive.
Similarly, we are borrowing invariably more on the repo, very less on the MSF as compared to July and now coming at 8.75 percent, that by itself has reduced the cost for the bank. So that will be a positive factor for banks.
As the RBI said, it can revise rates higher at any stage if the indications for inflation are not good. So, then banks will again have to take a call. But as of today the liquidity position for the banks and particularly UBI, we are quite comfortable on that.
Q: How do you see the banks move on rates because most of your peers have pointed out that despite this policy there won't be any cut either in lending or in deposit rates, what is your view on that? Will Union Bank look to cut rates and if not in the lending or deposit will there be any cut in bulk deposit rates that some of your peers are considering?
A: It is a very interesting question. First, I would like to point out that at UBI, we have maintained the housing loan rate at the base rate. And even earlier in 2012, we were providing a Rs 30-lakh loan at the base rate which we raised to Rs 75 lakh. So borrowers have already benefitted from loans being provided at base rates.
At the same time, since inflation still has to come down, we are not too sure whether we will be able to reduce the rate of interest on deposits.
But at the same time, the bulk deposit of the bank by itself is very low. We are not focusing too much on the bulk deposits at the moment.
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