See benefit of MSF rate cut over long period: Bankers

Commenting on Reserve Bank of India’s (RBI) step to bring down the marginal standing facility (MSF) rate by about half a percentage point from 9.50 percent to 9 percent, Rajat Monga, CFO of Yes Bank says the reduction is not an immediate benefit but is spread over a long period because the deposits are not going to reprice all at the same time.

They had moved in favour of deposits versus certificate of deposits (CDs) because the pricing of CDs went way above the pricing of deposits. At present deposits for them stand at 80 percent of their balance sheet and the rest is equity and other long-term funding, says Monga. Romesh Sobti, CEO of IndusInd Bank says this MSF rate reduction would surely ease liquidity and that in turn would drive relief on the interest front. According to him reduction in the bulk rates by about 100-150 basis points (bps) would mean that over the next quarter, rates could soften by 50 to 75 bps. Total bulk funding for IndusInd Bank stands at 35 percent of the total base. Also read: RBI steps good sign for eco, but repo rate may rise, says HDFC Below is the verbatim transcript of their interview on CNBC-TV18 Q: What is the sense; will life become a little easier, what is the percentage of your money that comes from certificate of deposits (CDs) at all? Sobti: Our total bulk funding is in the region of about 35 percent of the total base. So we have already seen a reduction in the bulk rates in the last month or so, about 100-150 basis points (bps). This would mean that over the quarter and mostly the next quarter, rates would go down by another 50-75 bps. Generally, there is a relief on the interest front and of course liquidity will drive that relief. Q: You would see improved margins in the current quarter? If you can give us an estimate of what margins might have been in September quarter and will be in December quarter? Sobti: Our margin movements are very marginal. I cannot give you the number for Q2 because the numbers are going to be declared next Monday but very marginal movements we saw. So the overall cost of funding didn’t move up so much. We expected that the impact to have been more in Q3 but that is going to be neutralised now because we also had good repricing on the asset side of the business. Q: How much benefit will this MSF rate cut of 50 bps incrementally provide and where would the cost of fund now come down to? Monga: The benefit like Romesh Sobti is saying is a little bit up, little bit down. So the measures like RBI had announced in the first place were always meant to be temporary and what we are seeing is a wind down of the steps that RBI has taken. Margins have been and will be in a narrow range. So the consequences of the tightness for a couple of months were limited and that the rates that are being dropped now, the consequences also will hold back. Q: What is your percentage of wholesale source of money? Monga: The CDs are about 6 percent of our balance sheet and just in the last two months, we have been able to refrain from issuing CDs because the pricing of CDs went way above the pricing of deposits. So it was simplistically decision to move more in favour of deposits. Q: Generally how much do deposits account and how much does wholesale money account for? Monga: The rest is all deposits. Deposits are about 80 percent of our balance sheet, the rest is equity and tier-II and other long-term funding. Q: Would bulk deposits have been impacted by this, I just want to know if you get the substantial benefit because of the reduction in rates? Monga: I would not say that the benefit is substantial because the loss also was not that substantial. So the benefit is spread over a long period. If you look at deposits, deposits are not going to reprice altogether, all at the same time. Yes, on the margin, it is beneficial but it is going to be spread over time, the deposits will continue to reprice. RBI has indicated a tepid kind of function in terms of adjusting rates. So repricing will drag even over a longer period.