The Reserve Bank of India has introduced liquidity coverage ratio (LCR) which requires banks to hold significantly higher levels of liquidity compared to earlier times. In an exclusive interview to CNBC-TV18, Uday Kotak, Executive VC and MD of Kotak Mahindra Bank explains how banks have to now factor in factor in LCR in their cost of funds which makes it difficult to pass on the rate cut benefits. He says it can be done by March or in the first quarter of new fiscal.
“In my sense March or early next quarter is when I see the possibility of rate cuts by banks. Either post Budget, therefore in the month of March. But keep in mind, March is again a busy month because of tighter credit policy. Banks will be reformulating their base rate policy. So either March or Q1 next year, I believe transmission should happen.”
Speaking about possibility of further rate cuts by the RBI, Kotak said the apex bank governor is a Booth School economics who will act on the basis of data. However, if situation remain the same as it is now, Kotak expects CPI to trend between 5.5 and 6 percent by December-end.
Below is the transcript of Uday Kotak’s interview with Latha Venkatesh on CNBC-TV18.
Q:Are we are likely to get many more rate cuts this year?
A: Reserve Bank of India (RBI) under Governor Raghuram Rajan is what I would call as a purist RBI — approaches first data and this is Booth School economics, which is — I will act on the basis of data I get.
Second, a very clear roadmap about what one can expect say 1.5-2 percent real rates therefore give me data on inflation, make it convincing and I am ready to move.
Q: How would you therefore assess, do you see enough evidence? You are a veteran economy watcher as much as you are a market watcher, are you getting a sense that we have seminally conquered inflation and therefore you can reasonably expect rates?
A: I think it is still early days but I do believe that the global deflationary pressure will help and if I was taking a call end December, assuming nothing changes in the world, my bet on consumer price index (CPI) is between 5.5 percent and 6 percent.
Q: So a couple of more rate cuts in that sense but you are not passing it on?
A: We will certainly consider it but there are various other factors at play.
Q: What is blocking the transmission?
A: First is the RBI over the last few months has now introduced liquidity coverage ratio (LCR) which means banks have to hold significantly higher levels of liquidity compared to earlier times and there is a price for LCR. So banks now have to factor in the cost of LCR within its base rate calculations and to be fair to the RBI, they have allowed banks to come out with a new model for base rates based on the new facts, which are now required when base rate was originally introduced, there was no LCR. So we have to factor in LCR in our cost of funds.
Q: Along with that you have also got some reduction in statutory liquidity ratio (SLR), two SLR cuts have come over the past several months?
A: But look at SLR, LCR together.
Q: How much have you to hold together with LCR and SLR?
A: When SLR was 22 percent, LCR — effectively marginal standing facility (MSF), which was allowed was 7 percent that is 2+5. Which means 15 percent of SLR is not considered for LCR.
Q: You think now you have to wait for SLR to fall significantly before base rates are cut?
A: We are watching the situation, of course there is a 25 bps repo rate cut, which is important which has to translate to lower deposit rates, which we are seeing early signs of. If you look at retail deposit rates, which used to be at 9 percent for most banks, now they are 8.75 percent. The transmission has to happen and combined with that we have to factor in LCR in our new base rate calculation and post that we will be able to take a judgement call of when we can justifiably say that our cost of funds has sustainably come down.
Q: For the system, when do you think money gets cheaper for — when do equated monthly instalments (EMIs) fall for instance?
A: In my sense March or early next quarter is when I see the possibility of rate cuts by banks. Either post Budget, therefore in the month of March. But keep in mind, March is again a busy month because of tighter credit policy. Banks will be reformulating their base rate policy. So either March or Q1 next year as things stand today I believe transmission should happen.
Q: Let me come to the other big announcement at least for me that came from the credit policy that banks have been told that if a project is stalled and you change the promoter to a better one then you get two more years before that loan is marked as an non-performing loans (NPL), is this a revolutionary change?
A: I think it is a good change but let us see which bank can remove which promoter. I think it is a space to watch and Indian promoters are also fighters. So it is going to be important to see whether this plays out.
Q: The RBI seems to be empowering bankers to do whatever they can or they must to improve the functioning of their borrowers? The convertibility clause also is now going to be probably re-written to allow them to get an equity control?
A: This is the first time I am seeing in Indian banking that the Central Banker is rightly saying that equity owners must take the first pain before the debt owners take the pain, which is back to my belief that we are seeing a pretty pure way of looking at things that equity owner first before lenders take the hit.
Q: Let me approach the same thing from a macro angle. The RBI has done this to enable bankers to get more power. They have also introduced the rule whereby you can restructure infrastructure loans in such a way that you only give for the first five years and then reset it for the next 25, along with all this, do you think infrastructure is getting out of the woods or is it going to take a long time?
A: Not yet. It is going to take time and this time around I am a believer that between now and end of March, a lot of banks will restructure loans because this is the last window they have. I give credit to RBI for taking a position that no further restructuring from April 1 and beyond April 1, recognition of reality. Therefore in many ways, the stress situation, which was postponed over the last three-four years — the day of reckoning is coming in 2015.
Q: So we are likely to see a quantum leap in NPLs even in Q1 of FY16?
A: In my view, early recognition for banks is important. The issue and the challenge is the next step particularly with state-owned banks recognising the reality on their balance sheet, how will they recapitalise themselves. Wherever they have got higher ownership, significantly higher than 51, they can go to the markets but what happens one year later or one and a half years later when you hit 51.