Costs of deposits bound to rise : PNB

S C Gupta, chairman and managing director at Punjab National Bank, the nationalised bank in India, says that the banking sector has been in news because inflation is an important concern for both fiscal and monetary authorities.

According to him, the cost of deposits is bound to rise. Banks will sit down and decide through their asset-liability committee meeting as to how to adjust their portfolio on the deposits and lending side.

He also says that PNB still has the board approval for 25 bps PLR hike, and is insulated till 7.72 per cent on bond portfolio.

CNBC-TV18 shares with domain-b its exclusive interview with Gupta:

Will lending rates go up now? Will this be across the board and how much would it go up by you think?
For the last three-four months we are in the news because inflation is one area which is causing lot of concern both to the fiscal authorities and the monetary authorities. The RBI governor, while announcing policy in the month of April, had projected inflation to be kept between 5-5.5 per cent but then it breached first to the level of 6.11 per cent and then came down to 5.97 per cent and again to 6.11 per cent and now 6.58 per cent.

So, on two occasions — the first on 8 December, 2006, and now on Tuesday, the governor used the hike in CRR, which was originally at 5-5.5 per cent in December, as an effective weapon in two tranches.

As it is, I find that looking to inflation, liquidity and credit growth taking place, credit is growing more than what was anticipated, so obviously we will have pressure on interest rates; deposits for two-three months or short-term deposits for between three and six months are not available even at 9.50 per cent.

Some banks are even quoting 9.75 per cent and now with the hike in CRR to 6 per cent, to be effective from 17th February and 3rd March, the cost of deposits will go up as deposits are growing at 22-23 per cent while credit is growing at 30 per cent.

I am sure that all banks will have to sit down to take a view through their asset-liability committee as to how to adjust their portfolio both on the deposits side and lending side. This will mean an across the board hike in lending rates, that is a mean change in PLR.

Punjab National Bank's PLR today is 11.75 per cent. The last time we went to the board to increase it by 50 bps, it was permitted, but effectively we introduced a hike of 25 bps from 11.50 per cent to 11.75 per cent effective January.

So we still have the approval for another 25 bps. I will take a view on as to how the CRR hike is going to affect PNB's liquidity, with interest not available on the incremental portion to be kept with RBI in the shape of CRR and other costs. Obviously the rate of interest on deposits and advances will go up and all banks will have to play cautiously up to 31st March because the time left is very limited now.

What are you expecting on your net interest margins as a bank and what happens now to your bond portfolio?
This is another area because PNB is comfortably placed on the net interest margin. For the last 20 months I have been able to take a number of steps along with the members of the asset-liability committee and as a team attempted certain exercises by reducing the cost of deposits and increasing the levels of advances including yield on advances, so my bank's net interest margin which used to be 3.76 per cent as at March 2005, now stands hiked to 4.25 per cent as at December 2006 — on that front we are comfortable.

But the main worry is that the incremental cost is huge and with the CRR hike in December 2006 and now this week with RBI announcing the increase to 6 per cent, obviously for the 10-year yield and the 5-year yield the difference which used to be 20-30 bps is now just 5 bps. I am sure this will also hit the security portfolio particularly of all banks without exception and PNB will also have to worry about it and calculate my overall profitability by end March, if the rate of interest and inflation continue at the present level.

Till what yield level on the benchmark bond are you hedged right now and above which you start hurting much more on the treasury portfolio?
My bank is insulated up to 7.72 - 7.73 per cent and the benefit of reduction and duration, which we deliberately attempted during last 1-2 years, the benefit of which should have accrued to us is not there because on the shorter-term I find that the gap is reducing and 25-30 bps, which use between 5-10 years, is now 5-7 bps.