Foreign banks in the country appear to bear the brunt of policy rate increases more severely than their domestic rivals. The cost of funds of foreign lenders surged last financial year, though state-run and private sector banks were able to reduce it.
For foreign banks, the cost of funds was 3.11 per cent in 2010-11 (April-March), 28 basis points higher than the previous year. Government and private sector banks, however, pared their cost of funds by 46 basis points and 27 basis points, respectively, during this period, data released by the Reserve Bank of India (RBI) showed.
Bankers and industry analysts said foreign banks, with a limited branch network, have not been able to expand their share of low-cost deposits as compared to domestic banks, which affected their cost of funds.
“We continue to focus both on corporate and retail deposits. But the issue is because of our restricted branch network, our deposit mix does not have a favourable bias on Casa (current account and savings account) deposits as compared to public and private sector banks,” said a senior official in charge of retail business of a foreign bank in India.
Public and private sector banks have also been reducing their dependence on bulk deposits and, instead, focusing on expanding the share of low-cost Casa deposits.
“Strong growth in the core deposits of the public and private sector banks and shedding of bulk deposits by them has led to a decline in their cost of funds. Their old high-cost deposits are also getting replaced by low-cost core deposits now. Large bulk deposits with foreign banks are responsible for their rising cost of funds,” Naresh Thakkar, managing director of Icra, said.
Domestic public and private sector banks were mobilising bulk deposits at high interest rates till the economic crisis of 2008. This was also reflected in their cost of funds, which was rising till 2008-09 financial years.
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These deposits, which are maturing now, are re-priced by the banks at lower rates, leading to a decline in their cost of funds.
“Public sector banks had mopped up large deposits at interest rates as high as 11 per cent just before the financial crisis in 2008. Now these deposits are being re-priced at much lower rates,” said Ravi Kumar, chief financial officer, Bank of India.
Foreign banks were not as aggressive as their local rivals in mobilising these high cost deposits during 2006-08, analysts said. As a result, their current cost of funds does not reflect the benefits of deposit re-pricing, they added.
Bankers said that if the RBI continued to raise key policy rates to tame rising inflation, the cost of funds of both domestic and foreign banks would rise in the current financial year.
“The impact of the policy rate hikes on the cost of funds will be shown from the second quarter this financial year,” Bank of India’s Kumar said.
RBI has raised key policy rates 11 times since March, 2010. The central bank’s next mid quarter policy review is scheduled on September 16.