'Interest rates should remain stable'

ICICI Bank declared its results in the midst of chaos. The bank witnessed large-scale withdrawals a few days ahead of its results. This was on rumours that it was facing a severe liquidity crisis.

However, the bank managed to tided over the crisis by organising a line of credit from the Reserve Bank of India. After that, when fourth quarter results were announced, analysts were surprised.

They had predicted that total revenues would come down because of a fall in treasury profits. But the bank managed to beat the street by recording a 6.06 per cent rise in total income. Interest income as a proportion of total income increased from 79.90 per cent to 85.61 per cent.

ICICI Bank has been one of the most aggressive players in the banking sector in making attempts to recover money from defaulters. Subsequent to the passage of the Securitisation Bill, the bank has issued 50 notices to defaulters with the amount coming to Rs 1600 crore (Rs 16 billion). It has also reached the top slot in the retail segment with a marketshare of 20 per cent.

In a recent press conference, the management team led by managing director and CEO, K V Kamath, talked about the bank's performance and its initiatives for future growth. Kamat dispelled doubts about the bank's solvency and reiterated that it has a good monitoring system to take care of cash withdrawals under normal conditions. Excerpts:

What steps are you taking to ensure that the huge outflow of cash, like the one that happened recently, does not happen? Do you have a Balanced Scorecard to forecast such a problem?

We have managed to handle the problem of high fund outflow. But then, we have had to decide whether this was a problem that is inherent to the bank, or was it the result of a rumour. We have to look at it as a logistical challenge.

When we took stock of the problem, we found that we were a solvent organisation. There was no problem with the bank per se. It was only that in certain pockets like Gujarat, there was excess withdrawal of cash. As soon as we realised what was happening, we rushed cash to these locations.

We have an on-line monitoring system for ATMs where we know when the cash in the machine is running low. However, if a two-day cycle becomes a four hour cycle, then we have a problem.

Problems like these involve a physical challenge of moving cash. We are building up a business continuity plan where we can move cash if such a situation arises in future. We would be better equipped than other banks because we have a first hand experience with the problem.

After sending out a number of notices under the Securitisation Bill, you suddenly seem to have become quiet. Does this mean the bank is slowing down in terms of bad debt recovery?

We were among the first banks to send out notices to borrowers. The idea behind it was that borrowers who were avoiding us would actually come forward to settle their debts.

The real benefit of the Securitisation Bill accrues when defaulters, under the threat of a take-over of their assets, come forward with a settlement agreement. There have also been instances where a defaulter was in the process of selling assets.

As far as our slowing down is concerned, it is a misconception. We continue to send notices to defaulters to force a settlement.

Your provisioning seems to have shot up during the year. Is that a reflection on the quality of assets?

We decided to make use of the capital gains that accrued from the stake sale in ICICI Bank to make additional investments. Going forward, we believe that cement, steel and textile industries, which comprise a major share of our advances, to improve. This should help in reducing the provisions that we have to make in future.

We would like to point out that we have adopted a stricter method of providing for standard assets than the Reserve Bank of India. Whereas the RBI recommends a 0.25 per cent provisioning for standard assets, we have adopted one per cent provisioning. For credit cards, we have adopted two per cent provisioning.

What is the status of ARC?

The ARC is being formed with certain select banks such as the ICICI Bank and the State Bank at the core. The ARC is very close to being set up and the search for a CEO is on.

With the stamp duty for transfer of a legal title being reduced to a maximum of Rs 100,000 per transaction, the cost of transferring assets has become nominal. This should enable the setting up of ARC in the country.

Where do you see interest rates heading, both on the deposit and advances side? How will it impact your business?

We see interest rates stabilising from here on. Though we believe that India can do with further reduction in interest rates, much also depends upon the state of the economy; both within the country and from a global perspective.

An increase in economic activity would cause interest rates to rise. Therefore, we believe that a fair estimate would be that interest rates should remain stable and lending rates should also not vary much. Whatever change has happened on the lending side has been substantial, with little scope to decline further.

The people who depend upon the industry must also realise that lending rates cannot be cut to a level that it becomes unviable to continue in the business. However, any future change in the interest rate scenario, be it a further decline or increase, would be passed on to customers.

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