The Hindu Business Line : `Interest rates may remain firm in the short term'

MR K. Rathnakar Hegde took over as Executive Director of Union Bank of India four months ago. Prior to that he served in Vijaya Bank, handling assignments both in the field and at the headquarters.

His portfolios included treasury, credit, forex, and balance sheet management. An Arts graduate with a law degree, Mr Rathnakar Hegde says he has little time to pursue interests outside his profession. Asked to give his management philosophy, Mr Hegde says: "We should have a clear vision, definite plans and take our people along, because that is what matters in a service industry."

Excerpts from an interview he gave to Business Line at Chennai recently.

Where are interest rates headed? Have they bottomed out?

In the short term, nothing much may happen because of the sheer liquidity in the system. The repo investments of banks are around Rs 70,000 crore. So I don't think there will be any aberrations. But in the medium and long term, inflation and oil prices are worrisome. The US Fed rate is expected to move up after a few months. That will have an impact on domestic rates.

Of course every bank is gearing up. We now have an Investment Fluctuation Reserve to take care of fluctuations. Risk management tools are in place. Besides, most of bank assets are linked to a floating interest rate structure.

If there is a policy-induced push to increase deposit rates and this liquidity persists, won't you see your spreads coming down?

I don't think the policy push will be in that direction. It may in fact be to push rates down. If you look at small savings rates, they are consistently coming down. But they aren't able to bring it down as much as they want because a large number of people are dependent on interest income.

What about the impact of the Left parties on the policies of the new government? They may not allow rates to come down.

The political impact is always difficult to predict. But I don't think that it will have a major impact on interest rates. Interest rates could go up because of demand for credit and other conditions in the economy.

The current outlook is that rates could go up slightly. In that case, it doesn't make sense for it to be hiked now.

Is your bank shedding bulk deposits?

We are also doing it. Resources growth is interest rate-sensitive. If you pay higher rates, you get more funds. But you must have reasonable growth in assets. Otherwise there is no point in adding liabilities. Investment in government securities is not remunerative. So it is a reasonable policy to shed high cost resources.

We have been maintaining reasonable growth rates - but we have ensured that our credit growth rate, at an average of 19 per cent over the past three years, is higher compared to deposit growth rate. Our Credit Deposit (CD) ratio is among the highest in the banking sector, at around 63 per cent. That's rare among banks.

How much of your corporate lending would be sub-prime lending rate (PLR)?

Much of it, I should say. All mid size corporates, SMEs, direct lending to agri, priority - they are all 10 per cent and above.

But if you look at rated companies - it is all below PLR. If you look at infrastructure, it is below PLR. Export finance - the rate is slashed and for rupee finance, we are charging only 6.5 per cent. I would say that below PLR advances constitute nearly 50 per cent of our advances.

Doesn't that leave you very few options to make money?

The only thing that has come to our rescue is the reduction in interest cost. The dip in the yield on advances has been less than the cost of deposits. That is what has saved us. We have been able to maintain the spreads at around 3.24 per cent.

We need to retain our existing clients. Now to the extent of one's foreign currency resources, every bank is allowed to give foreign currency loans. But look at the extent of the dip there. You may be enjoying rupee credit at 14 per cent. I give you a foreign currency loan at 3 per cent above Libor. Your total cost works out to less than 6 per cent. See the huge dip? We have large resources - large base of NRI customers.

We made this money available to some customers, because we wanted to retain customers and expand - even when there was a dip in yields on advances.

What would be the quantum of such replacement of domestic currency with foreign currency loans?

It would be of the order of $400 million. This was earlier deployed with deposits with other banks overseas. The yield was slightly less. Now the yield is slightly less - but it is still not equal to the drop in costs.

Where is growth likely to come from? It would appear that most of the demand seems to be coming from the priority sectors rather than industry?

In the current year, we are looking for growth from industry, especially the core sector. Underutilisation of capacity in sectors such as steel is now a thing of the past. The working capital demand from them is imminent. And there will also be some fresh capacity coming in.

What if they source money through external commercial borrowing (ECBs)?

ECB is a difficult thing. Not everybody can source it. Somebody should be prepared to lend. What is available today is short-term buyers' credit. The cost is very high. But if you are talking long-term - the ECB, without guarantees of banks what is available - is only for few companies.

How is the credit offtake in the first quarter?

We don't have any problem of credit offtake now.

What about housing loans?

It is booming. Our main focus has been on trade related retail lending. We were traders' bank. As for housing - we were not focusing much on this earlier. We now have slightly less than Rs 2,000 crore in our housing portfolio.

The cost to income ratio has been improving for many banks. What do you attribute this to?

The ratio has been improving because of the impact of VRS and staff cost reduction. The amortisation will also be lower next year.

What about wage negotiations? Wouldn't that affect profitability?

It will not affect profitability. There was a 10 per cent hike in the previous wage negotiations. We expect something in the same range.

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`Interest rates may remain firm in the short term'