Simply put, the central bank has asked banks to keep aside incremental provisioning and capital requirements for exposures to entities that have unhedged foreign currency exposure.
Speaking on the recent RBI norms, Ranjan Dhawan, ED, Bank of Baroda , said the new guidelines may not have a major impact on them.
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"We have a fairly considerable exposure to foreign currency loans. Most of these are from overseas territories," he said, adding that a lot of corporates have taken ECBs (external commercial borrowings), but even then hedging of foreign exchange exposure is needed unless a specific waiver is given.
According to Dhawan, banks are facing margin pressure and a slowdown in net interest income (NII) due to a slump in credit demand. He, however, is hopeful that going forward, there will be a slow pick up in the GDP growth and NIIs (difference between interest earned and interest paid out).
Below is the edited transcript of Ranjan Dhawan interview on CNBC-TV 18
Q: I just wanted you to react to this news, first if you could tell us what is your total corporate exposure and exposure to foreign currency loans?
A: We have a fairly considerable exposure to foreign currency loans, most of these are from overseas territories. A lot of corporates have taken ECBs but in almost all these cases, we require the foreign exchange exposure to be hedged unless we give a specific waiver. Now, we will give a specific waiver if there is a natural hedge in the form of exports available.
Q: Will this push up provisioning not just for your bank but for the others in the industry as well?
A: I haven't gone through these norms. I am afraid, I have not as yet seen but I don't think it would have a major impact on us.
Q: Going forward what is the view that you have in terms of the net interest income (NII) growth because we just got the numbers of South Indian Bank where the NII has marginally slowed down and also a couple of other private sector banks like Yes Bank etc have seen a slowdown in NII, the growth just coming in at 14 percent versus that 20-25 percent that we are used to in the last many quarters. Do you get a sense that this is going to be a new normal where NII growth is going to slow down in a whole host of banks?
A: I think we have been seeing some degree of profit compression throughout the banking industry. The rate of growth of gross domestic product (GDP) has slowed down and as a consequence credit offtake has also slowed down in the broader economy. With the demand for credit going down, there has been a pressure on margins for sometime. Therefore, throughout the industry NII has slowed down.
Going forward, there is likely to be a slow pick up in GDP growth and therefore I would not go so far as to say that lower NIIs are here to stay. It depends upon the GDP growth going forward in the next few quarters and on that front, I think we ought to see a slow pick up.
Q: What is your call on the RBI monetary policy that is coming up? Off late we have seen clear indications of inflation coming down in both the consumer price index (CPI) data and the wholesale price index (WPI) data. Do you think that is evidenced enough for the RBI to extend the pause or maybe even hint that rates have peaked?
A: I have a feeling that RBI will pause. There is no doubt that the inflation data is more encouraging this time and going forward there is evidence that inflation should further ease. The food grain prices, there is no doubt, are declining and globally as we have been talking for sometime, the commodity prices also have shown a downward pressure, whether it is oil, whether it is gold, whether it is zinc, whether it is copper, commodity prices for several months have remained soft.
So going forward, I believe that inflationary pressure should ease and hopefully that should bring a reversal in interest rate cycle. For the present moment, I think it is early days yet and probably my sense is that we should wait and watch.
Q: What about the credit growth for banking system and especially from corporate side, do you see a pick up in that anytime this year?
A: Hopefully, yes. I think investment there is some evidence to say -- there were some figures, I was reading in a paper a few days back, which essentially said that investment has picked up in the last quarter and going forward, if there is more investment demand then corporate growth should also pick up and corporate credit should also pick up. I don't see any major jump as such in it. I would see a slow incremental change in 2014.
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