Will raise rates if stress continues: ING Vysya Bank

Interest rates will harden if the three-month Treasury Bill continues to offer 11 percent and the 2-year government bonds give 9 percent. says Shailendra Bhandari, MD & CEO, ING Vysya Bank.  He says there is no case whatsoever to lend corporates at 10 percent interest but the bank is in the wait and watch mode. ING Vysya Bank has not raised base rate yet.

He told CNBC-TV18 that a stressed-out company will come under further stress given the broader macroeconomic environment. So if this goes on for more than a few weeks, there will be more stress in the system and it will backfire on several of the banks. "If this persists till September, then the system is in denial if they believe that the cost won’t pass through." He is also rather skeptical about the projected credit growth.
On bonds, Bhandari says most banks these days have long bonds in Held-to-Maturity (HTM) portfolio. So at best, it could be an opportunity loss with the way yields have been moving. Below is the verbatim transcript of Shailendra Bhandari’s interview on CNBC-TV18 Q: Apparently a couple of your peer banks have raised their base rates today. Do you think over the next few months contrary to expectations earlier, interest rates are headed higher?
A: We have not raised our base rate as yet. We hadn’t reduced it also in a bit of flurry a few months ago. There is no doubt, if anybody believes that we can have a situation where money markets - you have three-month Treasury Bill at 11 percent, two-year government bonds at 9 percent and if this persists till September, then the system is in denial if they believe that the cost won’t pass through.
The logic that a lot of banks are saying is that we depend on customer deposits, but the reality is that there is a margin element of pricing and there is also an opportunity cost. So, if I can lend, for example Treasury Bill at 11 percent, there is no logic for me to lend corporate loans at 10 percent. I think what most of us however, are believing and hoping is that this would be truly temporary and right now there is a bit of wait and watch but this goes on for anything more than a few weeks, I think rate hardening would happen. Q: Take a look at the rupee this morning, with your expectations of this being temporary at 61.10/USD this morning which is not exactly paving the way for a pullback of those measures that the RBI has taken, but be that as it may, there is a system which is under intense stress in any case with people’s balance sheets. Do you think these companies will be able to deal with servicing their interest costs if rate starts moving higher? You have got a very clean asset quality profile but do you think the system at large is running a huge risk given the already fragile state of balance sheets?
A: That is absolutely correct and there was in fact a report by Crisil a few days ago and the fact that after the recent rate tightening, we have seen severe downgrades on gross domestic product (GDP) projections. I think it is inevitable that a company which is facing pressure would come under further pressure but that is subject to the fact that at some stage we as banks pass this on or we slowdown saying we do not have the liquidity. So, still it is early but it goes back to what I said that if this goes on for more than few weeks, you will see more stress in the system and it will backfire on several of the banks. Q: While some of these things are still influx in terms of whether or not rate starts hardening, what happens with the short end and the long end of the yields? What about loan growth. Yesterday, one of your peers was pointing out that industrial loan offtake is extremely poor and given the recent measures these kinds of industries are going to struggle even more. Would you say for banks they have got tough road setup even in terms of meeting the loan growth they have been doing till now?
A: I have been saying this for sometime and one of the reasons why, for example we as a bank do not give hard targets. We normally say we will do better than what the market does is because we have been quite skeptical about the projected credit growth. The reality is that if you have a gross domestic product (GDP) growth of 5 percent, if you have inflation of 6 percent, you add the two up, you get about 11 percent and even if you assume there is no investment happening, so it is all just plain consumption even if you are little bit more, you come to 12-13 at the most. You certainly do not come to the 15 percent number. Q: Do you think there is a going to be a big reset for banks because of the way yields have been moving, some losses coming up from that front?
A: I cannot comment. I think most banks that have long bonds, have them held to maturity portfolio. So, it could be at most an opportunity loss. I do not think too many banks are nowadays keeping long bonds in that part, which is mark to market. So, what you will see is that you may not wind up seeing losses but to the extent that you saw people booking profits in the June quarter. That probably would prove quite difficult in the next few quarters.