Asset quality to deteriorate further in FY13: Nirmal Bang

In an interview to CNBC-TV18, Hemindra Hazari, head-Equity Research, Nirmal Bang Institutional Equities says that the asset quality will continue to deteriorate in financial year 2013. He also says that he does not see economic growth improving from hereon.

RBI’s move to reduce bank’s exposure to gold loans form current 10% to 7.5% indicates that the RBI is becoming uncomfortable with gold loans. Hazari further says, that the ultimate objective of the policy is to enhance investments in the country.

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: Will removal of pre-payment penalties on housing loans and RBI’s direction to banks to reduce gap between bulk deposit in retail-termed deposits impact banking sector or some specific company?

A: This policy indicates that the RBI wants to reduce interest rates in the economy. Banks will not reduce interest rates; however, a reduction is possible once wholesale deposit rate comes down.

The ultimate objective of this policy is to enhance investments in the economy. Even if interest rates come down, investments in the economy would not be enhanced.

Global factors contributed to a surge of foreign capital coming into the country as it did with all emerging economies. Global events will determine the extent of investments in the economy and not the direction of domestic interest rates.

Q: A 50 bps move by the RBI was to facilitate some pass-through, 25 would have been a token amount. You are not expecting any kind of a pass-through not even a margin 25 bps cut in the lending rate or the base rate?

A: Banks may do a token gesture to reduce interest rates but it could not be a sustained performance by the banks. The Union Budget has been inflationary; the reliance on indirect taxes is inflationary.

If administered prices are market determined then you are letting loose inflationary forces in the economy. Therefore, banks borrowing cost, particularly CDs would continue to remain high which is the real determinant for banks’ interest rates going forward.

Q: Bank’s exposure to gold loans is reduced to 7.5% from 10% earlier, your analysis on Muthoot and Manappuram?

A: The measures that the RBI has undertaken indicate that RBI is becoming increasingly uncomfortable with gold loans and the extent to which gold loans are provided. There is a possibility that RBI wants to dissuade gold as an investment asset.

Q: What is your expectation in FY13 in terms of credit growth and asset quality?

A: There are signs that asset quality will continue to deteriorate. I do not see economic growth improving from hereon. Europe will continue to be weak and global events will not be positive and this in turn will influence the Indian economy.