Interest rates nearly peaked, may go up by another 25 bps: UCO Bank CEO

Soma Sankara Prasad, managing director and chief executive officer of the Kolkata-based lender in an interview that he expects strong interest for the rupee trade from several nations

UCO Bank was the first lender to have received the Reserve Bank of India’s approval to open a special Vostro account for trade in rupee. Soma Sankara Prasad, managing director and chief executive officer of the Kolkata-based lender, tells Manojit Saha in an interview that he expects strong interest for the rupee trade from several nations. Excerpts:     

UCO Bank has received RBI’s approval to open special Vostro accounts for INR trade. Has any transaction taken place yet?  
 

This is a mechanism the Reserve Bank of India (RBI) put in place to internationalise the rupee. This mechanism is country-agnostic. So far, we got approval to open one account, with a Russian Bank–Gazprombank. That account has been opened but no trade or transaction has happened so far.  

Is there any country that has approached UCO Bank for opening a similar account?
  

I do not have the exact details but there may be countries that would be interested in the rupee mechanism for trade, particularly Sri Lanka and Bangladesh, as well as others in the Gulf region and in Africa, where India has a lot of trade. This will take some time to pick up. Going forward, I think we will see strong interest in the rupee settlement mechanism for these countries.  

Loan growth was robust till the second quarter. Is the momentum continuing in the third quarter? 
 

Yes, it is. Over a period of time, say by March 2023, it will gradually moderate. For the financial year, we are expecting it to be 15-16 per cent.  

Lending rates have gone up sharply in the past eight months. Do you think this can hurt loan demand?  
 

Though, to a certain extent, it is true that loan growth hampers credit demand but not entirely true for a simple reason. During the Covid-19 period, interest rates were historically low. But there was no demand for loans at that point in time. I think loan growth to a large extent depends upon how the economy is growing. We know that India is the fastest-growing economy and is the lone bright spot in the world, so loan growth is directly linked to economic momentum.  

Do you think interest rates have peaked, or are near the peak?  
 

I think interest rates have nearly peaked. Inflation data for November has come below the RBI’s comfort level of 6 per cent. We should also remember whatever the repo rate hikes are, the impact is there with a lag. I think interest rates have nearly peaked and they may go up by another 25 basis points — and that will be the terminal rate (6.5 per cent).  

Deposit rate is lagging loan growth. Banks have increased deposit rates. Do you see further scope for an increase in deposit rates?  
 

Deposit rates always go up with a lag. Transmission on the lending side happens immediately. It has not happened on the deposit side because banks were flushed with liquidity. With the liquidity situation becoming a bit tighter for the banks, a number of lenders, including us, have increased the deposit rate. Also, if you look at the inflation data and deposit rates, we have entered an area where the real return is positive. I am not saying deposit rates have peaked, depending on how the liquidity situation pans out and the loan demand, we have to see the impact on deposit flow, depending on which the banks will take a call on whether to further increase them or to hold them at the current level.  

UCO’s domestic margins were close to 3 per cent in the second quarter. As liquidity tightens, can you hold on to such levels?  
 

I think we should be able to maintain the levels because our credit deposit ratio is only 60 per cent, which is quite low. A lot of our money has gone to government securities when there was a lot of liquidity in the system. So, the deposit rate is pretty high for UCO Bank. Since we have a lot of liquidity in the SLR [statutory liquidity ratio] securities, we can utilise the liquidity by way of sale or borrowing against the SLR securities to reduce our cost of funds. Though the deposit rates have gone up, they will have some impact on the NIMs. But by and large, we expect the NIM to stay between 2.85-3 per cent, going in the next two quarters [Q3 & Q4 of FY23].  

At the end of Q2, UCO’s capital adequacy ratio (CAR) was 14.3 per cent? Do you plan to raise capital?  
 

We are adequately capitalised. You must remember that we have made a profit of almost Rs 625 crore in the past two quarters, and we are projected to earn a net profit of Rs 1,500 crore [full FY]. This profit will be added back to the capital only at the end of the year. Once it is added back, our CAR will cross 15 per cent.  
 

We are planning to raise Rs 1,000 crore by way of Tier-1 bonds for which we will be approaching our board for approval.  

Are you looking to sell NPAs to NARCL? 
 

There is a large NBFC account for which NARCL is also a bidder. So, the decision will be taken by the Committee of Creditors based on the bids. Apart from that, we have some small accounts where we are not the leaders [of consortium].