HDFC Bank, the country's second-largest private-sector lender, slashed its base rate - the minimum rate at which it lends - by 0.35 percent to 9.35 percent, effective Tuesday. The move comes after the Reserve Bank of India cut its benchmark repo rate thrice since January this year (by a total 0.75 percent), and urged banks to follow through with cuts in their lending rates.
The move by HDFC Bank is likely to put pressure on other large lenders such as ICICI, SBI and Axis to follow through with rate cuts of their own.
SBI, MD - corporate banking, P Pradeep Kumar says, it has been continuously reviewing base rates and lowering deposit rates since August or September last year. "A further cut will depend on SBI's cost of funds, composition of asset portfolio, etc.," he told CNBC-TV18.
SBI has around 80 percent of its loan book related to base rate and to that extent a base rate cut will have a far greater impact.
Kumar further adds that at the moment he is comfortable with SBI's capital adequacy ratio.
Additionally, the Reserve Bank of India (RBI) on Monday released its list of Domestic Systemically Important Banks and the list features names like State Bank of India (SBI) and ICICI Bank.
Below is the verbatim transcript of P Pradeep Kumar's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: Is it inevitable that banks like you have to respond to 35 bps cut?
A: Banks continuously review their cost of funds and base rate periodically. We have been cutting for deposit rate from last September even on August 19 we have cut some of the deposit rate. So this is a continuous process evaluating the deposit rate and the base rate. So we would be continuously looking at it.
Latha: The competition has already gone ahead. Would there not be a fear of market share loss. You may have to respond or for that matter ICICI Bank or other big banks in the market will have to respond quickly?
A: Every bank has to take a call depending on its cost of funds, the composition of its assets portfolio. We will review. Reviewing is a continuous process and we continue to review and we will change as and when required.
Sonia: What came as a surprise was not the cut by HDFC but the quantum or the magnitude of the cut which was 35 basis points (bps), I guess it was able to take that large base rate cut because only 30-40 percent of its own loan book is linked to the base rate for PSU banks like yourself where a higher percentage of loan book is linked to the base rate. Do you think it will be tougher to take such a big cut as and when it comes through?
A: I am not aware of the composition of HDFC's loan book related to base rate but yes for a bank like us, it is around 80 percent linked to base rates. So any base rate cut will affect 80 percent of the loan book. To that extent, yes the base rate will have a far greater impact for bank, which has 80 percent of its loan book related to base rate.
Latha: The other news as well that you all had declared a domestic systemically important bank (D-SIBs), that will mean a higher cost of capital for you, 0.6 percent additional tier-I capital as a percentage of a risk-weighted assets, can you give us a number, how much in today's asset book would that mean in terms of higher capital?
A: This is expected, I think it is a no-brainer that SBI is one of the D-SIBs. Earlier the draft guidelines indicated 0.2 percent of additional capital from this year and effective it became 0.8. As of 2016, the capital requirement is 9.625 as per basel guidelines including capital conservation buffer (CCB). We are very comfortable, we are at 12 and tier-I at 9.62.
Latha: I am not saying now you have to raise capital but what I am asking is that this puts you at a slight disadvantage in terms of return on equity. You have to work that much harder to produce the same return on equity (RoE)?
A: I agree. Yes, 0.6 percent additional capital requirement would necessarily mean that we will have to work harder to retain the same RoE.
Latha: Is it correct to assume that for banks like you and the entire gamut of big banks in the immediate quarters that are Q2-Q3, margins could be under pressure because you have to respond to this base rate cut but eventually you will cut deposits and manage. So is it fair to assume that Q2 and Q3 at least would be a lower margin?
A: We have been cutting deposit rate right September last year and we recently cut on August 19. The impact of this will slowly be seen in our books. In Q1 our cost of fund has come down by 4 bps and we do hope this will fall continuously. We will review our base rate as and when required.
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