Rates to remain elevated for loans, bulk deposits: Bank of India MD & CEO

With rising cost of funds, loans rates on highly rated corporates will need a relook to protect margins, he says

With the quest for resources becoming intense, Bank of India is stepping up efforts to raise low-cost deposits through branch networks in semi-urban and rural areas. With the rising cost of funds, loan rates for highly rated companies will need a relook to protect margins, Rajneesh Karnatak, managing director and chief executive, tells Abhijit Lele. Edited excerpts:

The Reserve Bank of India (RBI) has kept the policy rate and the stance unchanged. What is the signal to the market? How are the rates likely to move in the balance part of the year?

The pause was expected. The anticipation was that if any change happened, it would be in the third quarter. The signal to banks is that interest rates will remain elevated while giving credit and raising deposits, especially bulk deposits.

Also, in the case of corporate credit, especially to AAA borrowers, lenders will have to take a fresh look at pricing. Even though risk weightings are 20 per cent for highly rated borrowers, the cost of deposits is rising and margins are getting impacted.

Most of the deposits are coming from the retail side because banks are offering special schemes. Do you think such schemes will continue?

The rate of interest on retail deposits has gone up in the past four months. All banks -- public-sector as well private -- are running giving incentives for retail depositors to park their money in fixed deposits. I think this trend will continue in the next two-three quarters.

Raising bulk deposits is not a problem. It is only a question of rate. In this way liquidity is not a problem. But the challenge is if you want to reduce the cost of deposits, we need to improve our retail term deposits and also the current accounts savings accounts (CASA) deposits. Banks that are able to control their bulk deposits portfolio will be better placed as far as net interest income and margins are concerned.

How will the branch network come in handy for deposit mobilisation?

Of all our branches, 65-66 per cent of those are in rural and semi-urban areas. We will scale up efforts in these areas.

Coming to loans, the RBI governor highlighted the concern on topups, especially in home loans, where the norms are not being adhered to. Where does Bank of India stand in this respect?

The RBI’s concern is not that credit is rising but about certain segments in which it is flowing like unsecured loans. It is concerned about gold because there has been some reduction in its price.

On the unsecured side, as far as our bank is concerned, the personal loan books are very small and in gold loan LTV (loan to value) is properly maintained.

Personal loans have only a 1.4 per cent share. Most of these loans are to salaried people whose salary accounts are with us. We have security in the form of cash flows.  

The RBI has asked banks to focus on leveraging branch networks to mobilise household savings. Is it a shift in emphasis?

About 30 years ago, the main focus of all banks used to be only resource mobilisation and all targets were related to deposits. In the past 10-15 years, the liability side had taken a backseat in the sense it was coming automatically and the credit side was the focus and growing loan books. Now with the tightening of resources, the focus is back on liabilities, especially cheap funds, so that the net interest margin is protected.