Borrowings of banks are at a fixed rate and it takes some time for the cost of funds to come down
Kotak Mahindra Bank needs no formal introduction. This Sensex company has a presence across all areas of lending. In a conversation with Hiral Thanawala, Shanti Ekambaram, President-Consumer Banking of Kotak Mahindra Bank, talks about the problem of interest rate transmission. She also elaborates on how consumers must assess the stability of a bank before parking their deposits. The bank has rolled out a festive loan scheme, Kona Kona Khwaab Loan Utsav and she explains the need for the same. Her advice is also to avoid debt traps. Excerpts.
Q: The Government of India and central bank have taken measures to revive the consumption demand. Do you think they would help?
A: The cut in corporate tax (to 22 percent) announced in September by the Government of India was a massive sentiment booster for consumers. This rate cut releases sufficient money in the hands of corporates, which will encourage investments and lead to price cuts.
The Reserve Bank of India (RBI) is also doing its best to revive growth. Since February this year, the RBI has cut the repo rate by 135 basis points. Banks have been transmitting and passing the benefit of the rate cuts to borrowers with a lag effect. Most banks have also linked floating rate loans to an external benchmark such as the repo rate from this month.
Q: The repo rate, at 5.15 percent, is now at its lowest level in nine years. But, why the transmission has not happened much from banks? Also, do you expect more rate cuts in the coming months?
A: As RBI cut the repo rate, banks have been transmitting lower rates to their borrowers, but with a lag. This is because borrowings of banks are at a fixed rate and it takes some time for the cost of funds to come down. For instance, take the one-year term deposit. Last year, the interest rate was 7.5 per cent per cent on the term deposit. This year, the interest rate on the same deposit has come down to around 6.87 per cent. So, when last year’s term deposits mature, a bank’s cost of funds will come down. Hence, the cost of funds for banks comes down with a lag, and the bank is then able to pass the rate cut benefit to consumers.
In future, the central bank will watch the geopolitical situation very closely while reviewing the repo rate as this may be impacted by oil prices. An increase in oil prices will have an adverse impact on our balance of payments and fiscal deficit. So, the central bank will watch the economic data very closely. We expect that there will at least be another 25 basis points rate cut in this financial year.
Q: People are hesitant to spend these days. Your festive scheme Kona Kona Khwaab Loan Utsav seems ambitious. But, there are other banks too offering similar loan schemes this year. Do you think your bank’s scheme would be a success?
A: The first half of this fiscal, 2019-20, has been fairly tough from a growth perspective. We have seen India’s Gross Domestic Product (GDP) grow around 5 per cent in the first quarter of 2019. This was due to a slowdown in consumption and private sector investments. However, the festive season has started in India and it will continue till November. So, this is a time period when Indians consume and there are great offers from manufacturers and financiers.
We believe that if attractive bank offers are made during the festival season, we will see a growth in consumption and demand. The Indian market is very large and each bank focuses on a different segment of consumers, so there is scope for every player to serve their customers with such loan offers. We believe that, together, banks can increase the demand for consumer products and credit growth, which in turn will contribute to economic growth in the second half of this fiscal.
Q: With the recent PMC co-operative bank fiasco and rumours of a couple of other private banks facing a debacle, what parameters should consumers watch out for while dealing with a bank?
A: There are two key parameters relating to all banks that one should look at: 1) The capital adequacy, i.e., how well capitalised the bank is; and 2) The levels of non-performing assets (NPAs). These two determine the financial health of the bank. Besides these, consumers should evaluate the management of the bank and also focus on corporate governance standards. Equally importantly, customers should not believe every message received on social media.
Q: How do your loan schemes and the imposition of spreads differ from other banks?
A: The loan schemes and pricing differ according to the product structure. In a competitive market, pricing is typically range bound.
Q: In your observation, are Indian millennials over-leveraged? Or are they close to getting over-leveraged?
A: Indian millennials have aspirations for a better lifestyle and hence do take on leverage such as a two wheeler or car loan and credit cards. If you compare Indian household debt as a percentage of GDP vis-à-vis other countries, I don’t think that they are over leveraged.
Q: There is a rise of the EMI culture among consumers with quick short-term and pre-approved loans available from banks/NBFCs/fintech companies; so what precautions should they take to avoid getting into a debt trap?A: Earlier, India was very low on household debt, which includes credit card debts, personal loans, consumer loans, etc. But in the last five years, it has gone up multi-fold. Millennials want to buy a car or a house, travel abroad on vacation, etc. very early in their life. And there are enough and more companies offering credit. Indians have started consuming debt, which is a good trend; but it must not spiral out of control. We advise such consumers to monitor their income and expenditure closely. Take on debt considering your ability to repay as well as future growth in income. Also, take into consideration other what-if scenarios such as a medical emergency and loss of job.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.