Don't expect lending rates to fall further: ICICI's Kochhar

Chanda Kochhar, Managing Director and Chief Executive Officer of ICICI Bank, said on Wednesday that she does not expect lending rates to fall further anytime soon."A large part of the lending rates cut has already happened," Kochhar said an interview to CNBC-TV18. "An immediate cut is unlikely. We will have to watch the Reserve Bank of India and see how much CASA remains [post demonetisation]."Kochhar said that while she was not surprised that the central bank had left the repo rate unchanged on February 8, the shift in stance from accommodative to neutral had come much earlier than expected.She said that marginal cost of funds based lending rate (MCLR) had come down more than the repo rate in the last 12 months, adding it is not just the repo rate that affects MCLR, but also cost of deposits.Kochhar said that the cost of deposits has already come down and she expects dormant savings deposited after November's note ban to remain in the banks, but the current accounts will see an outflow of money.She said that the impact of the note ban had been transient in most cases, with people reluctant to make purchases only for a short period as growth returned to normal by January.Kochhar said that domestic loan growth was at 12 percent in the third quarter, with retail growth at 18 percent, both of which she said were better than industry peers.On the government pegging gross domestic product (GDP) growth for FY17 at a higher-than-expected 7.1 percent despite the note ban, Kochhar said it proved that the government expenditure was on schedule.As far as slippages are concerned, Kochhar said it would not be advisable to look at the figures from quarter to quarter but to see the larger picture. She said that while slippages will happen, the next financial year should be better than the current one on this front.On NPA resolution, Kochhar said that comprehensive decision-making is the need of the hour and that discussions were on with the regulator. She said that the creation of a private asset management company (PAMC) structure, as recently suggested by RBI Deputy Governor Viral Acharya, had already been discussed in the past. She added, however, that any structure for resolution should be pursued.Kochhar did not rule the listing of ICICI's general insurance arm, but said nothing had been planned in the short-term.Below is the transcript of Chanda Kochhar’s interview to CNBC-TV18’s Latha Venkatesh.Q: Is your personal micro experience gelling with what the gross domestic product (GDP) number is telling you?A: Yes, the GDP numbers are saying that agriculture has done well which is indeed true. We had a good kharif crop, we had good rabi sowing. It is also indicating that government expenditure has moved as per schedule or even better which I think is credit to the government to be able to push the GDP growth through that route.If you look at our own business activities, we saw that October was good, maybe November people kind of waited whether it was to buy homes or whether it was buy cars and so on. However even for us in terms of our retail disbursements the December numbers came back quite sharply and January numbers were almost at the October levels.So, what happened in November was transient in most of the cases so to say.Q: Let me go by the Q3 numbers that you all gave. Loan growth upto then was 5.2 percent year on year but retail was up 18 percent. So, what may you end the year with, do you think retail will do even better than 18 percent and therefore your overall number can be at least high single digit?A: When you look at our growth which was 5.3 percent or so, actually you have to look at our domestic loan growth. Our domestic loan growth was actually more than 12 percent. We grew the domestic book at 12 percent viz-a-viz the system growth of 5.3 percent. So, we are growing at almost double the industry growth.Within that domestic growth of 12 percent retail is growing at 18 percent. Again our growth of 18 percent in retail compared to the industry growth rate of around 13 percent or so. So, we seem to be on track, our domestic business will grow anywhere between 12 and 15 percent, retail will continue to grow at around 18 percent, that is where our year end numbers would be. I would say that, that say a very strong story because it is almost double of the industry growth on an overall basis on domestic side and much higher than the overall retail industry growth rate as well.Q: Is there a rubber band effect because there was a lull in consumption which of course the GDP numbers are refusing to acknowledge or at least reflect, is there a rebound? Will retail end much better than 18 percent or even a little better than 18 percent?A: It is possible because some of this was kind of postponed demand. So, that will get translated in this quarter. So, it is possible but 18 percent kind of a growth rate is what we are running at in any case on retail.Q: Let me come to the cost of money, how much of the deposits you think will stay?A: I think on the savings bank account there is some amount of money that was just lying as dormant savings with people which has come back in the system, I think that money will stay. However some amount is just converting and informal economy into a formal economy because people were used to dealing with cash in some way and now they are dealing through the formal channels. So, that will go back in the economy in the regular use. I think we have not yet reached that clear timeframe where we will be able to project what the behaviour would be but on savings account more will remain. On current account less will remain because that will go back in the business.Q: How is all that impacting your costs or your margins more importantly? We saw series of marginal cost of funds based lending rate (MCLR) cuts. Do you think that we should expect both deposit and lending rates to fall further and how much more?A: Cost of deposits have already come down and more so the MCLR has come down. We always used to debate this – when will banks cut rates and when will my EMIs come down, I think this time around actually the banks have preceded some of the cuts in the cost of deposits or rather the lending rate cuts have in that sense preceded.If you look at it from April 2016 till now, maybe the repo rate has been cut by about 50 basis points, even the retail fixed deposit rates have come down 50-60 basis points. However the MCLR effectively has come down almost 100 basis points.So, it reiterates the point that I always used to earlier say that it is not just your repo rate cut that determines lending rates, it is the cost of deposits.Why did the cost of deposits come down? It is because lot of CASA money came in and that helped us cut the MCLR. So, from hereon I would say that a large part of the lending rate cut has already taken place. We will in fact have to see how interest rates move from here. There may not be immediate cuts that may happen very soon in the lending rates because we have to watch what Reserve Bank of India (RBI) does to rates, how much of CASA deposits remain in the system.Q: RBIs stance quite clearly has shifted to neutral from accommodative. The reading would therefore be that maybe they will not cut anymore at all. Then what happens? Do you still see a possibility because loan growth is weak for the system and you yourself are saying that a part of the deposits will remain? So, will the supply demand of money being so in favour of supply of money, is there a little more for cost of money? The governor seems to think so. He said we are into neutral but the banks will pass on.A: The banks as I said have – the MCLR cuts have been even higher than the fixed deposit cuts. Even on the RBIs stance the cost of funds depends not just on the repo rate movement one way or the other, it also would depend on the liquidity and what the RBIs stance is towards sucking out liquidity or not. So, that also determines the cost of funds. Also what would determine the cost of funds is the CASA movement, how much of CASA deposits really stay in the system. So, I would think it is very early kind of predict whether there would be further rate cuts and in which direction rates would move.I think from hereon we have to watch really to see the CASA behaviour before we are able to predict further.Q: Did the RBI stance surprise you?A: The not cutting of the rates – actually I was not surprised, I think that was not such a big surprise. In fact in my mind I was quite mentally prepared for that.Q: 98 percent of the people we polled were not prepared. They expected a cut.A: The shift in stance was earlier than what was expected by the markets.Q: Are you confident that in subsequent quarters, this and the next, you will be able to bring down slippages, albeit it marginally but will the trajectory be lower?A: First of all when we look at trends like this we should not be looking at quarter to quarter to quarter trends. I think we have to look at little larger horizon. I would say that slippages will happen but if we would look at the whole year, I think FY18 should be better than FY17. However that should not be taken to interpret that the first quarter would turn out to be much better. Overall if we look at it I would still think that when you look at a horizon of a year as a whole, yes there should be some improvement.Q: Steel prices are rising, maybe those guys have enough EBITDA to at least pay some more loans, you are saying that there is probably a consumption rebound. All this is not even giving you the satisfaction or the comfort that last time the additional slippages were Rs 7000 crore, this time it will be Rs 6990 crore, even that kind of confidence is not there? I am asking you directionally. A: Directionally one should see that one is moving the positive trajectory but at the same time what happens is that many of these cases are lumpy accounts for the banking system. If one case turns non-performing asset (NPA) in that quarter the numbers go up substantially. So, whether you are able to settle that case this side of March or that side of April can make a difference to quarterwise numbers. Therefore I always believe that one should not be looking at trends on a quarterwise basis.Yes steel prices are going up, yes some of these companies are servicing part of the interest but overall the system really has to focus more and more on resolution.Q: Is the public sector nature of banks a problem? Is it that you are willing to sign off on an unsustainable debt and public sector banks are not able to because they have to worry about CVC and stuff like that, is that a problem?A: Finally the issue is that in every company there are almost 18-20 banks. Whether you break them into segments or not, the issue is that all the 20 banks have to be able to decide. So, even if 10 banks decide the other 10 are not.Q: 50 percent by value is enough?A: 50 percent by value is not enough any longer especially if you have a new buyer coming in. The new buyer needs to have everybody on-board because otherwise they don’t want to come into situation where then they would be left handling the rest of the banks. So, it is important that decision making is more kind of comprehensive because that is what the new buyer is looking for.Q: Because state owned banks have this problem of the four Cs as the chief economic advisor says – CVC, CBI, Courts, is that the stumbling block?A: That is also an issue. As we look at the entire ecosystem, we have to address that part as well. As I said it is not about one reason, it is about so many of these parts which are complex in the entire ecosystem.Q: New deputy government has proposed something like a private asset management fund and national asset management fund. Did you ponder over it, is that helpful or do you see that even progressing?A: My firm belief is that any structure that gives us resolution is what we should pursue - - so it’s as many structures that we think off - - that is very good. Finally, the devil is in the details of making sure implementation happens. I think even if you look at that speech, the positive of that speech are that he is saying let focus on resolution. Let focus on putting assets back into productive use, let focus on bringing back capital investment and employment.Q: Did you all discuss that since you were there on dais at IBA. Has the RBI or the government or Viral Acharya himself taken it forward?A: Many of these structures and similar structures have been discussed in the past also and are being discussed now as well. As I said, finally what we should do is whether the assets remain with the banks or whether they remain in a separate structure and whether that separate structure is a different bank or an AMC kind of an institute. I think we have to empower whoever is holding the loans with ability to decide and with resort.Q: He is asking for a rating of those, so that market says that this is a sustainable asset. Is that something you all are taking forward, is that workable?A: We are actually discussing is that there has been even in the past a very simple resolution mechanism called the corporate debt restructuring (CDR) – so we could just look at moving under that mechanism, making sure that under that structure joint decision takes place and they get implemented. Again the flexibility in that structure is even a way similar to the speech that was made that you don’t have to really focus on what exact percentage of the loan can be sustainable or not sustainable. You arrive at whatever is sustainable, handle the sustainable part in a sustainable manner, handle the rest of the part in a different formats and keep moving forward.Q: Is that what you all are asking RBI that allow us to not provide further sustainable part in the CDR mechanism?A: Provisions apart, I think what we are all discussing is that can we then start moving under kind of a CDR mechanism and look at your deep restructuring without having to stick to specific percentages as being sustainable.Q: If you read Viral Acharya’s speech. It is very clear that the regulator’s discomfort is when free hand was given for restructuring probably either loans were ever greened and can was stick down the lane. If we give you more liberty to restructure then you have a rating agency say that this is sustainable that seems to be the regulator’s condition.A: So two things here, one is that having a rating agency opinionated is always a very good, because that gives the market even more confidence – so one is not debating that at all, but to debate whether the restructuring of the past were good or not – I think also has to be juxtaposed along with the way economy moved vis-à-vis how it was expected to move.Every time you make a structure, you make certain assumptions on how growth will happen, how economy will move, how the project will move, how the approvals will come and then you have to go back and see whether those assumptions came into play. If the assumptions themselves don’t come into play then the solution obviously will not work.Q: What is the regulator saying, are you expecting some tweaking?A: We are in dialogue, let’s hope that soon we get some answers.Q: Your total stress, you already have your drill down list, you have SDR, you have your S4A if you put that entire list it came to some 11 percent or something. Will that stress number at least look lower in fourth quarter, in the next quarter is that number likely to come down.A: Again, we must remember that these are ratios – so ratios are dependent on both the numerator and the denominator.Q: Exactly what I am asking will you grow your way out, is what I am asking?A: But then that you have to look at the credit growth in the system. You should again not grow for the sake of growing and pickup any credit for the sake of adding to your asset base. I think the right approach to follow in this scenario would be one part look at the stress, focus on resolution.The other part is look at the credit growth. Of course grow to the maximum opportunity, but not grow recklessly just to grow your assets. The ratio will be a result of two and as I told you we are not letting go off any opportunity of growth. Our domestic book is growing double of the industry average. Retail is growing at 18 percent and we will continue to grow that, but we will not adjust our growth just to adjust our ratios. We will follow good growth on one hand and we will focus on resolution on the other hand and let the ratio be a consequent.Q: For instance will your credit cost in the current quarter and in the next quarter start falling. Have you picked out in credit cost?A: Don’t ask me quarter wise, but directionally yes, but quarter wise you should not really ask for and the credit cost is also a result of ageing – so the credit cost always start coming down with a lag because what you have recognised, you still have to provide ageing provision – so you should not expect credit cost to come down in a hurry.Q: This time also you had the advantage of the listing of your life insurance unit. Should we expect the Lombard listing also anytime soon, your general insurance?A: Yes, I think the confidence we have is that we have created fantastic franchises. Each one of these companies are now standing up in their own right, with creating their own place in the market universe as well. Life insurance company has shown that – so clearly we have a candidate available which way do we monetise a little bit more, which way do we create pricing benchmark, I think are left to us but you can’t rule that out. There is nothing that we are planning immediately, but you can’t rule that out.Q: One way to grow of course is inorganically. Should we expect something on those lines?A: I have always said that, “we are always open to look at opportunities that come at the right time and the right firm, but at the same time the focus always has to be that whether these opportunities come or not your organic growth model should be robust” and I think our organic growth model is very robust, so we are focusing on that.Q: I am just saying that there is a big bank which the government owns 26 percent either through SUUTI or through LIC through other units. Have you thrown your hat in the ring?A: I don’t know what is the ring first of all.Q: You can always approach the government and tell them that I am willing, have you?A: There is nothing that we are discussing as of now, but I don’t ever comment on market speculations.Q: Am I speculating, if somebody else’s is phoning, will you also not phone the government?A: Well, as I said a lot of these things that you are saying could only be imagination of the markets as well, could be imagination of the media as well but let me not get into any of these market speculations.