The tightness in liquidity is likely to worsen with advance tax outflows. M V Nair, CMD of Union Bank of India tells Manojit Saha the situation can only improve in the next quarter. Edited excerpts:
The liquidity deficit in the system has averaged Rs 1 lakh crore every day since the first week of November. When do you see this normalising?
Liquidity is a concern, especially when credit starts picking up. Reserve Bank of India (RBI), in the last policy, did make a statement that liquidity will be maintained in a deficit mode, plus or minus one per cent of net demand and time liability, which is close to Rs 50,000 crore. But the deficit now is substantially higher than that. With advance tax outflow, it will go up. While we are looking for government spending to bring back liquidity, it may not happen till end-December.
Apart from government spending, what other factors are causing the tightness?
One reason is that deposit growth has not kept pace with credit growth. There is a clearly a gap. However, in the last three fortnights, the quantum of deposit accretion has been impressive. Earlier, the incentive for savers was not there, as the real interest rate was negative, with high inflation and low return on deposits. It has got corrected: the rate offered by banks is higher and inflation has come down. In the next three and a half months, deposit accretion will be faster, meeting the requirement of credit growth. The present deficit in the system will have to be met through government spending. But it will happen with a lag. In the last quarter, we may find liquidity improving.
How much tightness do you see after the advance tax outflow?
Difficult to put a number. Banks still have some surplus in Statutory Liquidity Ratio, so you have some space.
Do you see a CRR (cash reserve ratio) cut an option?
There are various instruments which can be used by RBI. But CRR seems not a preferred mode because it may be against the policy objectives.
RBI projected 20 per cent credit growth, with 18 per cent deposit growth. But the gap between these two was far more. How much of a concern is this?
I think by the end of this year, the mismatch may be bridged. Last year, at this point in time, credit growth was slow, on the base of which it has grown 22 per cent. Actual credit growth had happened in the last quarter of the previous financial year. Also, deposit growth may be faster.
How was Union Bank of India’s experience in deposit mobilisation in the past month?
We recently raised the deposit rate and offered 8.1 per cent for 500 days. We have received very positive response. We got Rs 2,200 crore in 15 days in that category.
Will you raise the deposit rate further?
We are looking at the possibility of introducing new buckets which could attract more depositors. We may come up with a scheme offering 8.35-8.5 per cent shortly.
Some banks are borrowing from the overseas market to fund credit growth. What are your plans on this?
We have plans to raise resources for a medium-term note, for which we have done road shows in Switzerland. This is a new market we wanted to tap for better pricing. We want to raise in Swiss Francs and convert to dollars, with full hedging, provided we get a better pricing. We plan to raise $175-200 million.
You have not raised your base rate, while most banks have announced a revision in the past few days.
We will decide shortly. Since this is the last month when you can also change the parameters to calculate the base rate, we are looking to finetune the formula. At present, we are taking the one-year average cost of funds. We will continue to take the cost of funds as a parameter, but the formula may be slightly altered.
