Have already factored in 25 bps repo rate cut in Jan: BoI

In an interview to CNBC-TV18, N Seshadri, executive director, Bank of India said that the public sector lender has already factored in a 25 bps repo rate cut in the upcoming monetary policy this month.

The Reserve Bank of India (RBI) kept repo rates—the rate at which RBI lends to banks—and cash reserve ratio (CRR) unchanged. However, the central bank has hinted for a rate cut in January. Most industry experts see January rate cut as a key trigger for the stock market and the banking sector.  Further, he added that it will not be surprising if RBI slashes rates by 50 bps. Below is the edited transcript of N Seshadri’s interview with CNBC-TV18 Q: Many banks like yours have gone ahead and hiked deposit rates in the last couple of days. Can you give us an indication of whether this will help you tide over the liquidity pressures, what kind of liquidity pressures there are in the system and whether you will have to hike deposit rates further in the days to come? A: When there are changes in the deposit rate it is a function of asset-liability committee (ALCO) and you should not read too much between the lines in terms of the increase. After all it is the wholesale deposit which needs to be tweaked sometimes to meet not necessarily the liquidity, but in terms of their borrowing programs, I won't really give much of a credence to the changes which happens. Ultimately it happens almost on a daily basis or at least on a weekly basis, but overall there is not much of a liquidity strength let me assure you that because we still have not seen much of the credit growth happening although there is an expectation that credit will start growing. Banks should be in a position to meet the requirements of credit given the overall surplus in Statutory Liquidity Ratio (SLR), in terms of overall liquidity. Reserve Bank of India (RBI) has also said in fact they will interfere into infusing liquidity should there be a demand for credit. I don’t think there is any apprehension that we have to really factor in terms of liquidity and growth in credit. Q: What about lending rates, any decision taken over there yet in terms of whether you would be looking to lower them? A: On a selective basis, we have already reduced the lending rates. We have not done across the board in benchmark rates because we are still looking for some guidance where the benchmark rates if it is reduced by another bank, will be transmission. But having some amount of relief in terms of cash reserve ratio (CRR) and some softening, we have reduced in some segments of the credit especially in terms of SMEs, in terms of agriculture and also on retail. We have reduced the lending rate to push the credit and the banks would be in a position to have a full transmission as and when there is a rate cut which happens there. I don’t see there is any doubt on that. Q: There will be a number of PSU banks that receive capitalization from the government. Will Bank of India also get something from the government and will you require to raise capital in this year? A: We have made capital expend, in fact BOI will also get capital infusion. Nevertheless based on our present capital and our growth we should be in a position to meet the requirements of meeting tier I by March 31, 2013 because we are a very active international bank. Overall capital adequacy is comfortable given the retained earnings and the capital infusion that has been planned. And we do not see capital being a constraint in terms of growth as far as BOI is concerned. Q: You spoke about a pick up that you are seeing in terms of credit growth. What kind of credit growth do you think BOI could do by the time FY13 winds up? A: We have already given indication in 2012-13, there has not been much growth in the first quarter. We have seen some amount of interest but nevertheless in last quarter we will see some buoyancy but overall we would see about 14-15 percent growth rate for the current year.
Going forward for 2013-14, we expect the growth moving up by another 2 percent to 17-18 percent. But this year we will end up at about 14-15 percent. Q: Can you give us an outlook on your asset quality because that has been the big pressure point for BOI? Any relief that you are seeing with respect to the stressed sectors that is infrastructure, metals, that you have exposure? Do you think asset quality pressures will persist for a while? A: I have already shared that asset quality is a function of the overall economic outlook and sometimes some banks recognize assets ahead of the curve and sometimes with a lag. We have every stringent policy in terms of recognition and have seen that paying off because ultimately wherever we have market for recovery, there has been a response in terms of upgradation and we have seen some amount of thinning down. Quarter on quarter, we would see the asset quality improving and will get back to our levels of gross NPA to what we had last quarter. We have seen that improving each quarter. Q: What are your expectations from the RBI in January? Are bankers as well expecting to see a cut and do you think it is going to be large sized? Is there enough for 50 bps action and would you translate that into cutting lending rates by as much? A: A 25 bps cut is already factored and I would not be surprised with a 50 bps cut because there has been some moderation in inflation and growth has been on the agenda for RBI. If a 50 bps repo rate happens, I would expect full transmission of those rates into lending rates by the banks because banks do require growth and it is possible without much impact on the profitability, at least in the medium term. There could be some lag but banks should be in a position to have full transmission, full recovery of the cost in the immediate quarter.