Union Bank of India has managed its business cautiously amidst many challenges. MV Nair, CMD, UBI speaks to FE’s Kumud Das about the dynamic situation witnessed by the banking industry.

Is there any further pressure on rates?

There is an upward bias on interest rate. Even the latest data of headline inflation for January 2011 shows build up in core inflation on month-on-month basis, which is higher than trend. From policy rate perspective, there definitely is an upward bias for another round of hikes in 2011, say by 50 basis points. This obviously has implications for credit and deposit rates. Lending rates have peaked and we may see some cooling off in Q1FY12.

How do you see liquidity scenario in the system?

The liquidity in the money market has shown unpredictable trend in the recent months due to structural as well frictional factors. There appears to be asymmetric liquidity distributions in the system. The government has started drawing down from its balances with RBI. The latest data shows its balances coming down to Rs 27,000 crore from a high of Rs 95,000 crore in December 2010. The net repo borrowing continues to remain beyond the RBI?s stated tolerance level. .

How do you see your NIM in light of recent hikes rates?

In the previous quarter, Oct-December 2010, our NIM was 3.44 % compared to 2.77 %in Oct-Dec 2009 and up sequentially by 9 bps as well. Our guidance for full year is at 3.25 %. We are on track since nine-month?s NIM is 3.29 %. During the preceding quarter, we raised deposit rates and the same trend continued even in the current quarter. So, overall our NIM should remain protected.

Will you check your credit growth after RBI’s advice for banks to align their C-D ratio?

The incremental credit deposit ratio has gone above 100% in the case of most of the banks. This is one of the important reasons behind tight liquidity. As of end-January 2011, too, if you take it year-on-year basis, the incremental credit-deposit ratio of SCBs is 103% and we are at 70%. Normally, it should be in the range of 70-75 %. Our credit-deposit ratio is quite comfortable in the range of 70-71 % compared to near 75% for scheduled commercial banks. Thus, there is no point for revising our target of 25 % growth in credit by end-March 2011.

Have you succeeded in getting more deposits by raising rates?

With rate hikes, real return for depositors has turned positive after a long time. There is a good response.

How do you see your NPA ?

Our gross NPA level was at 2.79% in September. As of December 2010, our gross NPAs have come down to 2.68% and we expect it to be close to 2.3% or 2.4% by March 2011. I think the worst is over for us and hereafter, we will have declining trend in NPAs.

Do you think the restructured assets will slip into NPA?

Around 15% of restructured portfolio may turn into bad assets. As of December 2010, we have 13% of such assets as NPAs. There may not be significant deterioration.

There are concerns that real estate companies may default due to rise in interest rates Our exposure to the commercial real estate sector is only 2.3% of gross advances while the internal cap is 7%. We have not stopped the credit flow to the sector as such.

How do you see Malegam committee report?

The suggested measures would provide a stable and institutionalised framework to microfinance sector in the country. Only issue is to bring them into a robust institutionalised framework.

How are you trying to shift customers to base rate ?

We have set our rates such that normally the customers will get the benefit of 25 basis points in the lending rates whenever they shift to the base rate. We are maintaining both the systems. As the existing borrowers undergo 3-4 more quarters of rate cycle and awareness is created, we may see more shifting to base rate. We have over 20 % of loan portfolio referred to base rate.