Single base rate has rigidity: S S Mundra

Interview with Chairman & Managing Director, Bank of Baroda

Gross non-performing assets (NPA) at Bank of Baroda, the country’s second largest lender, have started declining in recent months. S S Mundra, chairman and managing director, discusses the growth strategy with Manojit Saha. Edited excerpts:

After you took charge in January, you said the focus would be to contain NPA. Going ahead, which will be your focus area, growth or asset quality?
In a large organisation like ours, it can never happen that for one year we will focus only on asset quality and not look at growth.  After the third quarter, I had said we will completely focus on asset quality.  The idea was to put the control mechanism, refine the process so that it becomes a continuing activity. But, now that the fourth quarter is over and the mechanisms are in place, I will concentrate on both.

Where do you see gross NPA figures by the end of the current financial year?

Gross NPA from domestic operations have come down to 2.86 per cent in the fourth quarter from 3.21 per cent in Q3. In absolute terms, too, there is a slight reduction in Q4 as compared to the previous quarter. Our overall NPA (including foreign operations) have also shown a slight reduction. We expect our gross NPA, in absolute terms, to be lower than what it was a year before.

What growth are you projecting for the current year?
Bank of Baroda has been growing two-three per cent higher than the sector average. The Reserve Bank has projected 14-15 per cent growth (yearly) in deposit and credit. So, if I go on the past performance, 17-18 per cent growth in business could be achieved this year. I can grow credit at 18 per cent and deposits at 17 per cent, as compared to 15 per cent and 22 per cent in the previous year.

For Bank of Baroda, liquidity is not an issue due to healthy deposit growth. Then why is monetary transmission not taking place?
There are four elements to it. First, if there was a 75 basis points (bps) cut in RBI’s repo rate, our base rate was also reduced during the same period, maybe by 25-50 bps. So, some transmission was there. Second, there had been a reduction in the spread on a selective basis. Every bank has reduced the spreads in some categories or the other. The third point is when you are operating under a single base rate, there is rigidity…there are some restrictions. There are certain sectors which always negotiate the interest rate...so, spreads are reduced for them. Since, the base rate is common for everyone, when it is reduced, those borrowers get the benefit again.

The fourth point is, the repo rate transmission was effective when liquidity was evenly distributed in the system, which is not the case now.  

When do you see a cut in lending rates?
As we have entered this financial year, clearly there is a bias towards softening of the interest rate. We were able to realign some of our deposits. If the trend continues for a while, we can review the lending rates.

But interest rates will not come down tomorrow. We will have some more clarity after the mid-quarter review of monetary policy next month.

Do you expect a further cut in the repo rate in the next policy review?

I don’t expect a rate cut. The previous repo rate cuts have not translated into reductions in lending rates, for a variety of reasons that I have just mentioned. In the previous review, too, the rate was reduced, so I don’t expect any rate cut in the June policy.

Is there scope for improving the net interest margin (NIM) in a falling interest scenario?
Last year, our annualised domestic NIM was 3.1 per cent. Only in the last quarter was there a slight dip below three per cent. We hope to defend those levels in the current financial year. Internationally, our NIM is 1.5 per cent, which is decent.

How much capital infusion will you require this financial year?
As on March, our capital adequacy ratio (CAR) was 13.3 per cent, within which tier-I is 10.2 per cent. So, we are comfortably capitalised. And, I have enough headroom to raise tier-II capital. Though the regulatory requirement of CAR is nine per cent, we would like to maintain it above 12 per cent, with tier-I above 10 per cent. We will ask for Rs 1,500-2,000 crore capital infusion from the government in this financial year.

Is there any plan to raise funds from abroad, by issuing medium term notes (MTN), for instance?

We would be raising one round of MTN, maybe within the first half of the year. The quantity will be between $500 million and $1 billion.