'Interest rates to harden, liquidity squeeze to end'

Most bankers are preparing for an increase in interest rates in the coming days. Some like the State Bank of India (SBI) and ICICI Bank are considering raising lending and deposit rates next week.

"We will review rates as they are under pressure," SBI chief AK Purwar said. ICICI Bank Managing Director and Chief Executive KV Kamath added that deposit and the lending rates were to be reviewed as they moved in tandem.

A dipstick survey of 14 bank chiefs revealed that only two did not expect interest rates to harden. "I still have a soft interest rate bias and the present phase is only temporary," said Vijaya Bank Chairman and Managing Director MS Kapur.

Opinion was divided on the liquidity position in the economy. The Corporation Bank said the liquidity squeeze was temporary. Canara Bank's VP Shetty said the liquidity position would improve from January and in any case it was not a problem at the moment.

"Barring the call money market, there is still sufficient liquidity in the system," added Indian Bank Chairman and Managing Director MBN Rao.

"Banks had short-term assets, which they can encash to improve liquidity," he said. Bank of India Chairman O Venugopal said liquidating such assets did not make sense at this point of time.

Those like Punjab National Bank chief SS Kohli said the liquidity squeeze had been created due to "credit hoarding" as there was a rush from borrowers to take advantage of the low interest rate regime.

Though interest rates are expected to harden in the short term, small banks are not willing to raise lending rates immediately as they fear a loss of business.

There were also differences on economic growth projections. While Kamath said growth would be in the 6-6.5 per cent range, Andhra Bank chief TS Narayansamy predicted 7 per cent growth.

Bankers are, however, watching oil prices closely and are expected to take a call on interest rates next week.

The Bank of Baroda and Bank of India have already raised their deposit rates and smaller banks are expected to take a cue from SBI and ICICI Bank, the two largest commercial banks in the country.

Banking to see more mergers: Purwar

The State Bank of India (SBI) today sought greater operational autonomy from the government.

Speaking at the Bankers' Conference 2004, SBI Chairman AK Purwar also said SBI's credit card and insurance businesses would emerge as industry leaders in their respective segments in the next two years.

He also said the Indian banking sector should be prepared to witness more mergers and acquisitions, along with the emergence of four-five world class banks in the country. He said in the increasingly globalised world, Indian banks should be prepared to enter into strategic alliances and expand overseas.

The SBI chief said even though the Indian banking sector had certain strengths like stability, it also faced various constraints. These included limited autonomy, widely dispersed branches, large manpower and lack of overseas practice. Another drawback was the limited application of technology in banking operations.

Corporate, retail credit not to be hit: Kamath

ICICI Bank Managing Director and Chief Executive KV Kamath today ruled out acquisitions in India or overseas and said the bank did not intend to alter its loan and investment portfolio.

"There is no rejig in the (loan) portfolio as the momentum in retail continues," Kamath told reporters on the sidelines of the Bankers' Conference (Bancon) 2004.

He said ICICI Bank was estimating a 40-50 per cent increase in retail credit flows and corporate lending had also picked up. Kamath also said the bank's overseas plans were also linked to Indian businesses abroad.

On interest rates, he said the bank would decide on revising lending and deposit rates next week.

He said a nominal increase in interest rates was not going to affect retail or corporate borrowers.

"There is scope to absorb a marginal increase in interest rates," the ICICI Bank chief said. He also said the liquidity situation was a bit tight.