Former chairman of Vijaya Bank, M S Kapur believes that the government is right in asking the PSU banks to stop raising PLRs since the bank rate has not changed.

But banking analyst Kanan Shah says that banks have no option but to raise BPLR (banking PLR) to maintain margins. She says that if PSU banks are not allowed to raise rates, this will lead to a major correction. CNBC-TV18 shares its exclusive interviews with Kapur and Shah

The market is saying that it should not be the government's job to dictate what the banks do even if they are in the PSU category. How do you view this in regard to the autonomy that the banks have been promised?
Kapur: In my view, the government is right in asking the banks to go back to the board because the bank should not increase their PLR unless the bank rate is changed. Conventionally, as a matter of practice and even logically, the PLRs of the banks are linked to the bank rate of the RBI. Since the RBI's bank rate is not changed, I don't find any justification in tinkering with the PLR of the banks. So as long as the bank rate remains the same, the PLR of the banks should not be changed.

Are bank officials authorised to increase the PLR depending on the market conditions; and going to the board what is that going to add in terms of functioning of rates for the banks?
Kapur: Bank rates have to be considered by the boards of the banks. According to me the fundamental factor is the cost of the funds. If the cost of funds is going up then obviously they have to increase the return on their advances also. What is happening is that deposit rates are being increased without a parallel need for the increase of the worth.

As it is, the RBI's liquidity report suggests that there is an excess of liquidity. If it is so then why the banks are taking the deposits at much higher rate of interest. Since they are taking the deposit at much higher rate of interest than the real rate at which they should take it, they feel that the interest on the advances should be increased, which according to me is not justified.

Do you agree that PSU banks are fairly comfortable in terms of liquidity position and they don't need to hike rates?
Shah: In last quarter also, the banks had seen margin pressure purely because the lending rates were hiked at a later date than the deposit rates. As the deposit rates have already been hiked, like a lot of banks have hiked it almost to 8 to 8.25 per cent, there would be pressure on the margins of the bank, if they do not go in for a lending rate hike.

I also believe that the BPLRis in conjunction with the bank rate. But then most of the advances are generally lent at the BPLR linked rates. So if the banks want to maintain margins at the current level or enhance margins marginally then they need to hike the BPLR.

Which are banks according to your research will be impacted the most in this scenario?
Shah: The banks with incremental lower C-D ratio, where in the deposits are increasing at a faster pace than the credit, will have higher costs of deposits and thereby face higher NIM pressures. These were most of the midcap public sector banks, which faced a lot of NIM pressure.

If you consider the credit growth, which has been over 30 per cent and the RBI has been targeting close to 20 per cent, do you think this kind of a measure is more prudent? Also, do you think private sector banks will benefit as a result of this?
Shah: Private sector banks are benefiting. We have seen that the competition for public sector banks is coming from the private sector banks. They are the ones, which took the initiative in hiking the deposit as well as the lending rates. The public sector banks are doing so just to maintain their margins and to survive the competition. So, I completely agree that private sector banks would be major beneficiaries out of this.

What is the impact that you foresee as a result of banks not being able to increase their lending rates and would their margins be under pressure?
Kapur: I totally agree that there is a pressure on the margins of the banks and they need to increase the rate of interest. But my point is that, unrealistically, they are increasing the deposit rates. They are taking the deposits at 8 per cent- 8.25 per cent rate of interest, when there is actually no need for it.

Will they not lose out to private players, if they do not stay competitive on the deposit side and simultaneously will it be the government that will be dictating their lending rates?
Kapur: As a banker my main concern is to make profit. I must borrow at low rate of interest and lend at high rate of interest. This is not necessary for me that I must increase the volume and my balance sheet size. I must see that I get the deposit at low rate of interest. As long as I get the deposit at low rate of interest and make good margin on the advances, I am all right with it. I can lose some deposit to the private sector banks and that is not the problem or the real issue.

Traditionally PSU banks have lower CASA ratio. They have low-cost deposits that put pressures because their spreads are not so big. Don't you think that they should push for credit growth more aggressively when there are RBI guidelines, which want them to hold credit down?
Kapur: I haven't said that the bank should go over aggressively for any credit growth. It has to be a very cautious exercise. It is not something that it can be given just because somebody is giving higher rate of interest.

A lot of prudence is required in giving the money. But what I am saying is that the efforts of the banks should be to get the funds, resources at low rate of interest. As it is, they are getting good margin on that. For example, the cost of deposit today is around 5 per cent or so. If banks are lending at 9 per cent they will get 4 per cent margin.

The market is really not taking heart form what the FM had to say. How much of a correction do you see coming into PSU banks from current levels?
Shah: If this status quo is maintained and if the banks approach to the boards and they are not granted the permission to hike rates, then there would be major correction in banks because the pure rally, which we saw in bank in the recent past was purely because of the fact that they were banking on that the margins would improve as lending rates would be hiked perpetually after the cost of deposits increased.