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Union Bank of India, Mumbai-based public sector lender, reduced interest rate for loans and deposits on the same day the RBI sprung a surprise policy rate cut. The base rate was cut by 25 bps to 10%. Arun Tiwari, chairman and managing director of bank spoke to Abhijit Lele on the factors driving its decision and the outlook for rates. Edited excerpts:
What triggered the cut in lending and deposit rate?
Union Bank has been reducing rates on term deposits, helping reduce incremental cost of funds. So we have passed on the benefit to customers by cutting the base rate. As for the trigger to revise deposit rates, bank is sitting on surplus money.
How much interest income would the bank forgo due to the base rate cut?
It will be a small amount. Since we have also reduced interest rate on deposits by 10-50 basis points in some, there will give incremental benefit in the form of reduced cost of funds. So impact will be near margin neutral. (Bank reported domestic Net Interest Margin of 2.6% for Q2 ended September 2014)
What is liquidity situation of the bank?
Union Bank is sitting on extra cash. The statutory Liquidity Ratio is about 25%, higher than the floor rate of 22.5% required to be maintained by banks. Till the credit demand remains subdued, the bank and system will continue to see surplus.
So, we may see a further cut in term deposit rates from the bank?
We will assess situation before talking a call. There could be some upward pressure on rates especially on bulk deposits close to the end of the financial year (March 2015).
The capital markets have perked up and bond yields have eased significantly. Has this made capital (equity\debt) raising plans more feasible?
It looks like markets have become more favourable than before. But, I would like not get into specifics of capital raising activity (timing and amount) ahead of third quarter results.
