The Hindu Business Line : `Interest rates have bottomed out'

MR M. Venugopalan took over as Chairman and Managing Director of Bank of India in August 2003 after a 3-year stint with Union Bank of India as Executive Director.

It was a homecoming of sorts for him as he had spent the major part of his banking career with Bank of India, which he joined in October 1966.

Reminiscing about those days, he said, "When I joined the bank over three decades ago, we needed to have a good handwriting and had to be good in totalling. Today, that skill is not required. What you require is a person with marketing skill and one who can handle computers. We are talking of core banking/multi-branch banking. I don't require a person who doesn't know computers."

Asked to comment on the wage negotiation talks with unions, he is forthright. "We are giving what we can afford. Compared to the private sector pay, it may be lower but then the work there is also much more. People should understand the realities. You have to monetise everything including allowances that officers and workmen get," he says.

Excerpts from the interview conducted in Mumbai recently.

How are interest rates likely to move? Is there any scope for it to come down further?

Absolutely not. Inflation is going up. International rates are going up. Don't forget that it is also election year in the US. Wait until the elections. It will go up. It has already gone up by 0.50 per cent. The liquidity position here may continue to be there for the next one year and only then dry up.

Is credit offtake happening? What is the impact of this on rates?

It is taking place. But the RBI figures don't show any significant jump. In the first quarter, credit offtake is always lower. You'll really know in the second quarter.

The Finance Minister is very clear that interest rates must be reasonable. He has left it to bankers. I am still paying 5.50 per cent interest on deposits. Then what about margin? I need 7.5 per cent as the bare minimum. Then what about capital cost, bad debts and profits? I should say nine per cent interest is reasonable.

But you still lend at sub-PLR, don't you?

Look at it this way. Today, the repo gives me 4.5 per cent. Once the liquidity situation is over, we'll not give it at those rates.

How much would your sub-PLR lending be?

We have a cap of 20 per cent of our lending for sub-PLR. We are much below that cap. But even otherwise there are a number of items where we give sub-PLR rates - lending against agriculture, housing loan and exports. Sometimes, I think the PLR has become the highest rate.

How about agri-lending target? How do you propose to reach it?

It is possible, but it will be difficult. We have achieved 18.6 per cent in agri-lending. We have been good not only this year but always. Our agri-lending has been good in Maharashtra, Gujarat, Madhya Pradesh, Bihar and Punjab. In the South, we don't have much of a presence. Still, I think a 30-per cent increase in disbursement is possible.

Lending to the farm sector at 8 per cent is a commercially viable proposition. Our NPA in this segment is 11 per cent which is reasonably good compared to other banks. I am quite positive on agri - I am from a rural area myself. There is a good opportunity.

Would you require additional capital under Basle-2 norms?

All of us would require additional capital. Remember that the RBI has changed the exposure norms of banks to investments in banks and FIs. Previously your exposure to banks and financial institutions had a risk weightage of 20 per cent. Now RBI has said that from March 31 2005, the risk weight will be 100 per cent. My capital adequacy ratio (CAR) that is at 13 per cent would come down by about half percentage point - down to 12.5 per cent if computed now. Then take market risk. The RBI wants us to provide for market risk on trading book by March 2005 and the whole book by 2006. If we apply that today, my CAR will go down by 1.2 per cent. Besides, the operational risk will take another 1 per cent. So, our CAR will be down to 10 per cent. That is why at this AGM, I took an enabling provision to raise additional capital. I am not going to raise money immediately, but we can be ready.

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