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HDFC Bank, which has seen some fall in the cost of deposits, decided to reduce the base rate from January 1. In an interview, Paresh Sukthankar, executive director, tells Manojit Saha that for a further reduction in the interest rate, the liquidity tightness needs to ease. Edited excerpts:
What has prompted HDFC Bank to reduce the base rate?
The base rate guidelines require banks to review the rate at least once a quarter. This year, this is the second time we have changed the base rate. The first was in the first quarter, when we had reduced it from 10 per cent to 9.8 per cent. This quarter, we have seen a a little bit of reduction in some of the fixed deposit rates and a 25 bps (basis points) reduction in cash reserve ratio (CRR), announced in October. As a consequence, the base rate has been reduced 10 bps. There was an impact in the cost of funds, and we have passed it to the customers.
How do you see this rate cut impacting your margins?
We will have to wait and watch to see the impact. Depending on what further happens on the deposit rates and what happens to policy rates, the cost of funds in the next quarter will evolve. In any case, a 10-bp reduction is not large enough by itself to have a major impact on the margins.
Do you see a softer bias as the cost of funds are concerned?
There are two elements to these. One, of course, is the policy rate indication. However, by itself, a rate indication may be a signal, but may not be enough (to bring down the cost of funds) unless it accompanies by further easing on liquidity.
Liquidity easing in terms of a cut in CRR?
Maybe a CRR cut or a combination of CRR cut and continuation of open market operations. Ultimately, the major impact on the base rate comes from deposit costs. If banks have to reduce their base rate in the future, they would have to further reduce their deposit rates. Banks will be comfortable in reducing the deposit rate if deposit growth was fairly healthy and total bank borrowing under the liquidity adjustment facility (LAF) would have been in the range of Rs 50,000-60,000 crore. Right now, it (banks’ borrowing under LAF) is three times of that. If the liquidity deficit continues to be in that sort of range, and even if RBI (Reserve Bank of India) drops the rate, it will be difficult for banks to cut the deposit rate.
There could be a downward bias of cost of funds, only if the liquidity conditions substantially ease from where they are today. We should also remember that we are entering the last quarter of the financial year when liquidity generally remains tight. Liquidity is a necessary condition for rates to fall and with the rate cut, it can become the sufficient condition.
How was your experience as auto loan demand is concerned?
The data from automobile manufacturers indicate sales have moderated. I would imagine that would lead to some moderation in the growth rate in auto loans. For us, this is one of the four or five products – though it is not the fastest growing products – that is driving growth. So, whether it is auto, personal loans, etc, these are the important components of our retail loan book.
What is the lending rate for the auto loans?
Depending on the segment, it will be 11 per cent to 11.5 per cent.
HDFC Bank had detailed a road map for the gold finance business. How is the business doing?
The business is doing fairly well, though it is still a small proportion to our total retail portfolio. On a small base, it continues to grow at a healthy rate. It is one of the four or five products we expect to grow at a healthy pace.