Festive rate cut not a mispricing of risks: Union Bank of India MD & CEO

In a Q&A, Rajkiran Rai G says retail credit can't make up for tepid corporate demand

The outlook for credit offtake, especially in retail, is good at the close of the second quarter, marked by easing restrictions and an uptick in economic activity, says RAJKIRAN RAI G, managing director and chief executive officer, Union Bank of India, and chairman, Indian Banks’ Association (IBA), to Abhijit Lele. But retail can’t make up for tepid corporate demand. Edited excerpts:

Many banks have gone for interest rate cuts in the festive season. How do you look at it? Will it lead to mispricing of risks?

Deposits are at much lower costs. The cost of funds has gone down while operating efficiencies have improved with digitisation. So benefits will now go to customers. This is not due to competition among banks. That is important because the economy is recovering from the epidemic. We are not losing money by giving such rebates.

It is not mispricing risks. Earlier loan processing and data collection were manual, now work is systems-driven. So the costs involved are much lower.

We are almost at the end of the second quarter. What are the growth trends in different business segments?

Things are looking up despite disruption in April-May. Collection efficiency is improving. Banks will share their numbers by the end of the quarter.

Retail is doing well. So is agriculture. In micro, small, and medium enterprises (MSMEs), we had stress and to some extent it continues. 

There is a lot of restructuring happening and it will take some more time for MSMEs to stabilise.

On the corporate loan offtake, what is feedback?

It (increase) is still some time away. The deleveraging that has happened in corporate credit continues even though we are witnessing some green shoots by way of expansion in steel, cement, textiles, and infrastructure. Sanctions are happening, but credit growth is not visible.

Capacity utilisation has not gone up but not so with working capital utilisation. All these things we expect to improve by the end of the third and fourth quarters. This period, also known as the busy season, is marked by festivities. So by the end of the year (FY22) we expect to see overall credit growth in the banking system to be close to 8 per cent.

This growth will be driven by retail this year?

Retail has a role. Vehicle sales have substantially gone up. There is a lot of traction in housing loans. With the kind of concessions and rebates, retail is expected to be better. But it will not push systems-level growth to 8 per cent (year-on-year basis). Retail is less than 20 per cent of the books (of the banking system). So even if I am growing (retail) at 15-20 per cent, the whole books can’t grow at 8 per cent.

Corporate credit is more than 50 per cent of the books and has to grow at 5-6 per cent for loan growth to reach 8 per cent. Working capital utilisation going up 10-20 per cent will push up credit growth. We see that happening after the festival season.

Coming back to MSMEs, some loans restructured in the first phase will see the end of the moratorium. Would it push up slippages?

Slippages in the case of MSMEs are incidental. They happen owing to norms like the 90-day default. We have to address inherent issues in MSMEs. They were under stress before the pandemic. The Reserve Bank of India had come up with a restructuring scheme for them in 2019 itself. MSMEs come mid-way between consumers and large firms. When large companies go under, MSMEs face stress. When demand goes down, they are in trouble. They are a very important part of the ecosystem. But at the same time they need to be supported particularly when such disruption happens. They do not have that kind of equity strength. 

How do you see interest rates move in the system?

At this point of time, I do not see chances of further rate cuts. A stable interest rate scenario is expected for some more time.