Costs
of deposits bound to rise: PNB
15
February 2007
S
C Gupta,
chairman and managing director at Punjab National Bank,
the nationalised bank in India, says that the banking
sector has been in news because inflation is an important
concern for both fiscal and monetary authorities.
According
to him, the cost of deposits is bound to rise. Banks
will sit down and decide through their asset-liability
committee meeting as to how to adjust their portfolio
on the deposits and lending side.
He
also says that PNB still has the board approval for
25 bps PLR hike, and is insulated till 7.72 per cent
on bond portfolio.
CNBC-TV18
shares with domain-b its exclusive interview
with Gupta:
Will
lending rates go up now? Will this be across the board
and how much would it go up by you think?
For the last three-four months we are in the news because
inflation is one area which is causing lot of concern
both to the fiscal authorities and the monetary authorities.
The RBI governor, while announcing policy in the month
of April, had projected inflation to be kept between
5-5.5 per cent but then it breached first to the level
of 6.11 per cent and then came down to 5.97 per cent
and again to 6.11 per cent and now 6.58 per cent.
So,
on two occasions — the first on 8 December, 2006,
and now on Tuesday, the governor used the hike in CRR,
which was originally at 5-5.5 per cent in December,
as an effective weapon in two tranches.
As
it is, I find that looking to inflation, liquidity and
credit growth taking place, credit is growing more than
what was anticipated, so obviously we will have pressure
on interest rates; deposits for two-three months or
short-term deposits for between three and six months
are not available even at 9.50 per cent.
Some
banks are even quoting 9.75 per cent and now with the
hike in CRR to 6 per cent, to be effective from 17th
February and 3rd March, the cost of deposits will go
up as deposits are growing at 22-23 per cent while credit
is growing at 30 per cent.
I
am sure that all banks will have to sit down to take
a view through their asset-liability committee as to
how to adjust their portfolio both on the deposits side
and lending side. This will mean an across the board
hike in lending rates, that is a mean change in PLR.
Punjab
National Bank's PLR today is 11.75 per cent. The last
time we went to the board to increase it by 50 bps,
it was permitted, but effectively we introduced a hike
of 25 bps from 11.50 per cent to 11.75 per cent effective
January.
So
we still have the approval for another 25 bps. I will
take a view on as to how the CRR hike is going to affect
PNB's liquidity, with interest not available on the
incremental portion to be kept with RBI in the shape
of CRR and other costs. Obviously the rate of interest
on deposits and advances will go up and all banks will
have to play cautiously up to 31st March because the
time left is very limited now.
What
are you expecting on your net interest margins as a
bank and what happens now to your bond portfolio?
This is another area because PNB is comfortably placed
on the net interest margin. For the last 20 months I
have been able to take a number of steps along with
the members of the asset-liability committee and as
a team attempted certain exercises by reducing the cost
of deposits and increasing the levels of advances including
yield on advances, so my bank's net interest margin
which used to be 3.76 per cent as at March 2005, now
stands hiked to 4.25 per cent as at December 2006 —
on that front we are comfortable.
But
the main worry is that the incremental cost is huge
and with the CRR hike in December 2006 and now this
week with RBI announcing the increase to 6 per cent,
obviously for the 10-year yield and the 5-year yield
the difference which used to be 20-30 bps is now just
5 bps. I am sure this will also hit the security portfolio
particularly of all banks without exception and PNB
will also have to worry about it and calculate my overall
profitability by end March, if the rate of interest
and inflation continue at the present level.
Till
what yield level on the benchmark bond are you hedged
right now and above which you start hurting much more
on the treasury portfolio?
My bank is insulated up to 7.72 - 7.73 per cent and
the benefit of reduction and duration, which we deliberately
attempted during last 1-2 years, the benefit of which
should have accrued to us is not 
there
because on the shorter-term I find that the gap is reducing
and 25-30 bps, which use between 5-10 years, is now
5-7 bps.
See:
Inflation
and the CRR hike
See:
CRR hike: Avoid interest-rate
sensitive sectors
See:
CRR
hike could dampen equity markets: J P Morgan
Other
reports on Punjab National Bank
General
reports on Banks
