"If you see the government treasury bills are being auctioned at 11-11.5 percent and how do you expect short-term loans to corporates to go at lower than that," he said, rubbishing reports that the yield on 10-year bonds was 8.2 percent.
"The question is has there been a 10 year auction? Let there be a 10-year auction at 8.41 percent and let us see what is the impact. So the actual bond rate is where the auction is and those rates are 11 percent," he said.
He says that credit growth is not an issue at the moment, but finding the funds to meet that demand is turning out to be a challenge for banks.
Because of the spike in short term rates, the commercial paper (CP) market is as good as closed. Also, companies are not tapping the external commercial borrowing market because of the volatility in the rupee against the dollar. All that demand is now spilling over to the banks.
Chadhuri feels that the RBI was not understanding the problem being caused to banks by the new rule on minimum daily maintenance of the cash reserve ratio .
"The problem is not of maintaining the balance, but that of not defaulting on it," Chadhuri said.
He said that banks were having to lock in extra funds with the RBI in the CRR account on a daily basis so that they did not fall short of the requirement in case of any large unforeseen withdrawals by customers.
"That is the point, possibly the banks treasuries have not been able to explain to RBI in the full extent or full detail," Chadhuri said.
Below is the edited transcript of Chadhuri's interview to CNBC-TV18.
Q: What are your thoughts after the policy has come to an end and now do you think that there will be more base rate hikes in the system after this repo rate hike?
A: I would not link -- again I am saying that the base rate is not a function so much of policy rates. The base rate is a function of the banks liquidity position, ability to make the deposit and the lending situation. Now the busy season has started. So there is a huge credit demand and banks are scrambling for deposits. So the deposit rate would go up and according to that the lending rates can also go up.
I would like to make a correction here. The repo rate is not 7.5 at all. That amount is just not available. What is available in repo rate is peanuts. So the actual repo rate is the marginal standing facility (MSF) rate. The MSF rate has been lowered by 75 bps so MSF rate is 9.5 and that should be recognized as the effective repo rate and not the website repo rate.
Q: Just to understand the cost of funding pre the changes of the MSF rate that took place, how has the cost of funding changed for SBI in particular or will change?
A: Cost of funding has not changed significantly because of the MSF rate. Cost of funding has changed because other banks have increased their deposit rates. So we have been compelled to offer 9 percent on 180 days deposit. So the cost of funding has gone up and we have increased our deposit rates across the board by 100 bps. So that is why our lending prices have also gone up. So the cost of funding is not a function of the repo rate or MSF rate, it is the function of the deposit rates.
Q: What would the impact be on the net interest margins (NIMs) of the bank at all if in case that is the situation going forward that there could be a possible hike in base rates from a lot of banks, are NIMs going to be pressured for most banks going forward and as an industry, how much of a pressure would you see?
A: I think the NIMs would be positive because what happens is if the deposit rates go up, you have to work backwards that this time there would be requirement for the busy season credit policy so the customers will have to come and borrow. Earlier some of them were going to the commercial paper (CP) market, some of them were going to the external commercial borrowing (ECB) market. So looking to the very low availability in the CP and ECB the whole demand and the bulk of the whole demand is going to descend on the loan market. To feed that demand the banks will go in for deposits. Now banks will raise the deposit rates and then they will calibrate the lending rate depending on their deposit rates. Earlier that was very difficult because the moment you increase the lending rate, customers go over to the CP market or customers go over to the ECB market. Those two markets being closed, the banks would have significant ability to increase the lending rate and yet not see a drop in demand. So banks will preserve their NIMs perhaps improve their NIMs in the process of doing so.
Q: Bankers like yourself have been constantly hoping for a reduction in cash reserve ratio (CRR) but today Dr Rangarajan categorically pointed out that a further reduction in CRR is not contemplated and the CRR is a peanut in the larger scheme of things, just to point out what he said exactly, what is your view on that?
A: It is not peanuts. We have 5.5 percent NPA and the CRR amount, the State Bank of India (SBI) has gross non-performing asset (NPA) of Rs 55,000 crore and our CRR allocation is Rs 60,000 crore. So the amount of funds on which interest is blocked due to NPA is Rs 55,000 crore and due to CRR is Rs 60,000 crore. So the impact on NIM of CRR is identical to that NPAs.
Secondly, it is not - I heard the governor speech and I have the highest respect for what he has said but the thing is that it is not keeping the CRR, it is the fear of not defaulting on the CRR. So supposing my 100 CRR I am maintaining, I would not keep 100, I would keep 110 but then you can come and say that you kept 100, yes, till 4 'o'clock I have to keep 100 only when I see that no further debits are coming, I can put that 10 to work but if the band was between 70 and 120 earlier, I would not keep it 110, I would keep 100, it doesn't matter if he drops to 90, it is not the end of the world. So all of us are keeping surplus liquidity. That is the point, possibly the banks treasuries have not been able to explain to RBI in the full extent or full detail.
Q: Now if the view is that lending rates might be headed higher in the system, what could the impact be on credit growth in your mind? Do you think that 15-16 percent credit growth can be maintained for FY14, what could the ballpark range be?
A: I cannot speak for the entire system. SBI is having a 23 percent credit growth and I think it will continue to happen that way, we have to find the resources. So credit growth today is not the issue because corporate India has nowhere else to turn. So therefore credit growth is a given, banks have to look for resources to fund the credit growth.
Q: I know you are not using the MSF window but a lot of banks use the MSF window. So for them money is cheaper do you think somewhere some banks will be able to lower rates?
A: We are using the MSF window because the repo window is so narrow, repo window for us is half percent of NDTL Rs 6000 crore, Rs 12 lakh crore is our NDTL, repo window is almost nonexistent. So you please count the repo window as not being there at all. So I don't think repo rate is relevant at all. What we are talking is MSF.
MSF is given against government securities, MSF is not lending agency. Now I have to pledge government securities. Now government securities if they are at 8.3 percent and I get refinanced at 9.5 percent then what sense does it make? It doesn't make any sense but it is better than 10.25 percent. So it was a negative carry, negative carry would reduce.
Coming to the short-term rates if you see the government treasury bills are being auctioned at 11-11.5 percent and how do you expect short-term loans to corporates to go at lower than that. Globally government borrows the cheapest, then the banks and then the corporates. Yesterday I heard you say that 10-year is 8.2 percent. The question is has there been a 10 year auction? Let there be a 10-year auction at 8.41 percent and let us see what is the impact. So the actual bond rate is where the auction is and those rates are 11 percent.
Q: As you admitted, the negative carry at least has been reduced, so is there some scope somewhere for banks to be able to cut anything at all?
A: Let us see what other banks think. What is being given with one hand has been taken away with another. The reduction in the export credit refinance has not been made good. The CRR allocation blockade continues almost at the similar level. So it is for each bank to work out its economics. But after all the demand and supply will prevail. If somebody is offering 10 percent on a deposit, I can offer 9.75 percent but I cannot offer 8 percent or I cannot afford to offer 8 percent. So the deposit rates will converge depending on what the highest guy is offering. Similarly, lending rates if there are more efficient lenders, the people who have higher base rates, they will not be able to get buyers. So, that is the way it would work. It would work differently for different banks but overall the demand for credit in the second half would be much higher than you are seeing in the first half.
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