Bad loans at banks are beginning to bottom out as the economy recovers and companies respond to measures taken by the Reserve Bank of India. The RBI may cut its repo rate by another 50-75 basis points, RK Gupta, executive director, Bank of Maharashtra, tells Sumit Sharma:
What's your outlook on the economy?
The World Bank and IMF predict 7.5 per cent growth. There's positive sentiment following measures such as the Insurance Bill, coal and spectrum auctions, and steps to restart stalled projects. The RBI has also announced measures such as extension of DCCP by two years or 5/25 refinance scheme to help restart stalled projects. CAD is manageable, CPI is declining and interest rates are falling. The environment is positive.
But credit demand remains low. When do you see it picking up?
The authorities have done their bit. It's for the corporate to react. We expect it to pick up from June.
How do you see base rate cuts impacting the economy?
It's too early to assess it. As the rate of interest falls, credit demand is expected to pick up. All other banks will have to start responding to the cuts from large banks.
What's holding up other PSBs from cutting rates?
While we can cut our lending rates, to keep margins intact a corresponding reduction in deposit rates too should take place. Incremental cost of deposit can come down but overall cost can't fall in a short period. Any rate cut in advances portfolio impacts the entire credit portfolio. Hence, the banks have not been able to pass it on immediately. Now as cost of deposit comes down, other banks will lower their rates.
Do you see more repo rate cuts from RBI?
Yes. CPI was a major concern and as the inflation falls much below the expected levels, probably the RBI may take a view before the next policy. I expect two to three 25 basis points each cut in repo rates. So, about 50-75 basis points cut.
Deposit growth remains muted. How do you increase it, especially when there is pressure to cut rates?
Since the credit demand was not there, most banks, including ours, didn't require more deposits. So we substituted
our high-cost deposits with normal cost deposits or through the CASA. Deposits and liquidity is available in the market. Our cost of deposits has already come down in the fourth quarter by 4-5 basis points compared with the earlier quarter.
NPAs are a problem for most PSBs. What is the way out?
As of March, NPAs are bottoming out. Whatever NPAs we recover will directly benefit our profitability. Because of economic recovery and steps taken by the Reserve Bank of India to help stalled projects, the performance of companies will improve as also their profitability. It will demand more working capital and companies will come out of distress.
But infra projects are still stuck.
Due to the nature of the business, infra projects will take at least another six months to come on line. Starting stalled projects is a priority. According to estimates, `18 lakh crore is stuck.
What about capital raising plans? The government owns 80%.
As of March ending, our capital adequacy is comfortable, at 11.60 per cent. If required, we'll take a view in the third quarter on how to raise capital through follow-on offers, QIP or bonds.
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