Q&A: M V Nair, Union Bank of India

'Lower credit growth, cost of funds prompted rate cut'

Union Bank of India is the first bank to cut its base rate in two years. Chairman and managing director M V Nair, in an interview with Manojit Saha, talks about the reasons. Edited excerpts:

What factors led to the base rate cut of 10 basis points?
The decision, taken in our asset-liability committee meeting, was based on September figures. We reviewed the components of the base rate and decided to pass on the benefit to customers. Overall, the Reserve Bank of India (RBI) has given an indication that interest rates may not be raised any more, and there is a possibility of these coming down in the future.

Deposit rates have not been increased in the last five to six months. In fact, there was moderation in some buckets. This has also impacted the cost of funds, which is reflected in the base rate reduction.

Going ahead, do you see more cuts in the lending rate?
The base rate is primarily driven by the cost of funds. It would also depend on the policy rate movement. We have to wait for signals from the central bank when it meets on January 24 to review policy rates.

Do you think the cost of funds would decline in the future?
Costs have remained steady. These would come down only gradually. A bank has to pay the interest rate to deposits throughout the contracted period, and unlike the lending rate, benefits both existing and new customers. The cost of funds may take some time to show a significant reduction.

How is credit growth faring?
We have seen credit growth slightly declining. As on December 16, it was 17 per cent, compared with RBI’s projection of 18 per cent for the current financial year. The lower credit offtake was also a reason for the base rate decision.

What are your expectations from the next RBI policy meet?
It is difficult to predict what the central bank would announce on January 24. The positive news is food inflation is coming down. Headline inflation, measured by the wholesale price index, which has come down in November, is likely to continue the trend.

Do you see net interest margins coming under pressure?
We have projected a net interest margin (NIM) of 3.2 per cent for the current financial year. At the end of the first half, it stood at 3.14 per cent. We are on track to meeting our NIM target.