Banks innovate to garner float funds

Faced with high credit growth and low deposit accretion, banks are being forced to seek innovative means to access float funds or that crucial low-cost money deposited for long durations.

To garner the cash, banks are tapping small and medium enterprises (SMEs), stock broker accounts with exchanges and agricultural lendings.

This has also become important as the traditional sources of float funds are drying up with the introduction of the real-time gross settlement (RTGS) system.

Today, it has common practice for banks to offer interest rates of 6-6.5 per cent for one-year deposits. Some banks even offer 7 per cent plus for wholesale deposits.

To ratchet up float money some banks are asking SMEs to maintain a minimum balance of Rs 1 lakh with them in exchange for cash management and other services.

The idea is to reduce the cost of borrowings as savings accounts attract a mere 3.5 per cent and current accounts maintained with banks do not attract any interest whatsoever.

Further, brokers in their dealings with the capital markets have to go through clearing banks for making payments and receivables. In the process, brokers also need to maintain minimum deposits with clearing banks.

"Lending to SMEs is incidental when banks offer a whole gamut of products including cash management products and export-related services," said a senior executive of a leading foreign bank, which aims to enhance its presence in the SME space.

The average low-cost deposits over total deposits among Indian banks today stands at 34 per cent based on Fitch Ratings data.

Some banks are improving skills and changing their focus in order to enhance net interest margins by increasing low-cost deposits, said Ananda Bhoumik, senior director, Fitch Ratings.

The low-cost deposits over total deposits for banks like HDFC Bank and Punjab National Bank are as high as 55 per cent and 46 per cent, respectively.

Foreign banks such as HSBC are moving into this space by attracting SME clients. "We are offering small exporters and SME clients trade and cash management services, where they would need to maintain a minimum balance of Rs 1 lakh. This enables them to open business vantage accounts and avail of all related services free of cost. In the process, this deposit becomes a float for the bank," said Subir Mehra, head, commercial banking, HSBC.

IDBI Bank and Citibank are major players in the SME space having linked top corporates to their vendors, the latter which are essentially SMEs.

"This helps banks get access to companies' funds using their branch network and thereby increase float," said senior bank officials.

Off late SMEs have seen favour among bankers. With large blue chip companies no longer knocking on banks' doors, bankers today are lending against the receivables of SMEs.

In addition to taping SMEs by offering them a plethora of free services, some banks are tapping deposits of brokers as they take on the role of clearing banks in the country. HDFC Bank boasts of settling daily volumes in excess of 50 per cent, which provides it with sizeable float funds.

"We would like to grow with the market as settlement and funding needs rise. At the same time, with rising settlements, we face no risk but are able to get more float," said Aditya Puri, managing director, HDFC Bank.

"As margins get squeezed, banks are looking at improving yields on the asset side by lending more to agriculture and SME on the asset side and tapping low cost deposits on the liability side," said Bhoumik.

Today as corporates maintain less funds with banks and with the introduction of RTGS, banks' ability to ensure longer free float periods stand reduced from a couple of days to a question of hours, said Bhoumik.