Indian Overseas Bank's Chairman and Managing Director, Mr M. Narendra, met Business Line at his office last week and gave his views on a variety of issues concerning the banking sector. Excerpts:

When do you see the tight liquidity scenario moderating?

The main problem of liquidity is that the Government hasn't been spending much. In terms of planned expenditure also some of it was cut. The Government is trying to reduce the fiscal deficit. Most of the borrowing has been completed. Once the budget exercise is done and after allocation of funds department-wise or program-wise, they will release the surplus back to the treasury to reduce the overall fiscal deficit. There is also year-end provision which is to be released. This will again ease the position temporarily.

Second, the proportion of FII and FDI is coming down and to that extent there will be some liquidity concerns. Third, of course, the savings per se have gone up, but a proportion of savings are going into gold, real estate and some into equity also. Once these savings come into the system the liquidity may become better. In addition, depositors in rural areas are holding cash as the prices of essential goods are going up.

The cash spent on NREGA is going up but it is not coming back into the system. Demand for credit also spiked due to the availing of sanctions since November coupled with 2G demand. Lag effect (deposit growth lagging credit growth) continued as the credit picked up in power, roads, infrastructure, engineering, even in hotels, hospitality, education, where there is working capital or capacity addition requirement. Capacity utilisation is almost 100 per cent. While the demand for credit has been going higher, the resources are not keeping pace. Keeping tight liquidity in mind, the RBI has extended the liquidity facility till April 8 of this year.

Structurally we have to induce people to invest in the bank. This may happen only as inflation moderates. The tendency of the people to invest in deposits is less until the inflation moderates, in spite of raising rates. These are some issues about which the RBI, Government and banks are worried. Of course, banks continue to hold more than required by the statutory liquidity ratio SLR).

Your bank has a very high credit-to-deposit ratio. Is there any moderation expected as the RBI is concerned about such high rate of credit growth?

Inclusive of international business our credit-deposit ratio is 80 per cent. If we consider only domestic operations our credit-deposit ratio stood at 76-77 per cent. The RBI hasn't said the credit-deposit ratio has to be brought down as banks were operating at such high ratio historically also. What the RBI said is that if the incremental credit growth is so high, then the banks have to necessarily align the lending growth to the deposit growth or the deposit growth to lending growth. So it is applicable to us also. IOB hasn't availed itself of the one per cent excess borrowing available to us. So we are within the limit of the RBI facility up to April 8.

Incremental growth in lending depends on how we go about raising incremental deposits and also whom to lend incrementally. For instance, we have now increased the base rate to 9.5 per cent. As on date, we have 29-30 per cent SLR also which we can always encash.

Please tell us about your capital raising plans going forward?

Our Tier-1 is 7.25 per cent, Tier-II is at 6.2 and total capital adequacy ratio is 13.5 per cent. We have long ago indicated to the Government that in our growth process we may require some capital. In the earlier process we didn't get any. It is not yet confirmed but we may get capital infusion going forward. And also growth rate of credit will also moderate. In case of IOB, the growth of credit is high because we didn't grow at all last year; on that basis the growth may seem high. The deposit growth is low therefore our lending growth will also have to moderate, to that extent the risk-weighted assets will come down. We have enough leverage to go for a qualified institutional placement (QIP) with Government holding around 61 per cent in IOB. We have written to the stock exchanges about what are the enabling mechanisms. So capital is not an immediate requirement but after looking at the capital given by the government we will take a call, may be, next year.

With deposits being hard to come by, what strategies do you have for raising deposits?

We have good number of branches in rural and semi-urban areas where the competition is less. It is only in the metropolitan areas, that too in the wholesale deposits where the competition is high. Wholesale rates are market-determined and every bank wants to have its share of these deposits. Our bank has one advantage as some high-cost deposits raised a couple of years ago are maturing which gave us some relief. However, the margin on these deposits is shrinking as we increase the deposit rates but still there is some benefit. The quantum of deposits maturing is also getting lesser. The idea is to go for CASA and you have to go to your own captive franchise customers and senior citizens for deposits. But overall cost of deposits is likely to rise further. To that extent we may increase the base rate. Banks have to keep a watch on asset-liability management (ALM). Systemic problem in terms of resource mobilisation will be there. But it all depends on aggressiveness, customer franchise, cost-selling and reach-out to the customers that will enable you to increase your resources.

Aren't banks facing ALM mismatches by lending to infrastructure sector?

These infrastructure projects normally have an implementation period of 3-5 years. Ideally, the duration of loans is also similar. Once that project is commissioned then your cash flows start coming in. It may not be equivalent to the amount you have given but there is a cash flow. Second, there is now a tendency, that once the project gets operational there are quite a lot of banks and financial institutions that would like to invest and take out those assets. You will have takeout financing. Apart from IIFCL, internationally also there is a lot of demand given the steady cash flows from such loans. Third, there is internally prudential exposure limits as to how much of it has to go to the long-term.

Now we have investments that are long-term but we have the ability to churn it. Same way, market for infrastructure will arise and alternatives apart from takeout financing will also emerge. But with the requirement being higher in infrastructure space, there is need for more institutions to come. Private sector also has to opt for ECB that is available on the long-term basis. Then infra-exposure for banks will be less than the current levels. Once India becomes a long-term destination, then the long-term resources problem will get sorted out, which I am definitely counting on. For instance, in Japan there is very high demand for long-term bonds. The entire infrastructure was created thanks to long-term bonds. That way we have to create long-term bond market here.

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