Banks will be able to get over the problem of growing inflation and rising interest rates by increasing the deposit rates, hiking prime lending rates and mobilising low cost deposits, according to K Ramakrishnan, chairman and managing director, Andhra Bank [Get Quote].

Ramakrishnan, who started his banking career with Bank of India [Get Quote] as a probationary officer in 1970, is retiring by the end of this month.

In an interview with Business Standard, the seasoned banker said banks should also augment their fee-based income, control costs and avoid revenue leakages. Excerpts:

How should banks respond to the rising inflation and growing interest rates?

The interest rates have been increasing because of inflation fuelled by the rising oil prices. The RBI is tackling the demand situation and the government is initiating measures on the supply front.

Banks need to raise resources continuously for funding credit and since liquidity is tightening, there is a need for attracting deposits at competitive rates. Hence, the banking sector should focus on increasing the deposit and prime lending rates in the next few months.

Don't you think such measures would affect the margins?

An increase in the deposit rates will lead to a strain on margins. Banks, therefore need to concentrate more on low cost deposits. They should replace bulk deposits with relatively lower cost retail deposits and bring the sub benchmark PLR credit closer to the BMPLR level, to maintain their margins.

Moreover, banks will have to augment their incomes through the sale of fee-based income products including mutual funds and insurance. They should base their credit portfolio on prudentially recoverable norms where the recovery goes directly to the P&L (profit and loss) account, while reducing controllable costs and avoiding revenue leakages.

Implementation of these strategies will help banks to come through difficult times and Andhra Bank is showing the way.

What about your proposal to raise $125 million debt overseas?

It is in the advanced stage of finalisation.

Are you also raising tier II capital?

Not immediately, as we don't need it now. Any fund-raising programme has its own costs. One should not raise capital unless there are profitable deployment avenues.

How much amount will you provide towards mark-to-market losses this year?

It is too early to arrive at a figure. The falling equity markets and rising bond yields will certainly have an impact on the bank's performance. We are calculating the details.

How is the credit growth so far?

We witnessed a credit growth of 23 per cent in the first quarter, while the banking system as a whole grew by 25 per cent. Banks have surpassed the RBI's growth expectations of 20 per cent.