Banks unlikely to hike rates on NRE deposits for now
Central bank says that credit demand still sluggish, pressure on margins
The Reserve Bank of India's (RBI) move to deregulate interest rates on non-resident (external) rupee (NRE) deposits might not persuade banks in increasing non-resident deposit rates now.
Bankers believe offering higher rates on these deposits might not increase fund inflows from non-resident Indians (NRIs) but will probably stress their margins further.
On Wednesday, RBI allowed banks to decide the interest they pay on non-resident deposits by removing the cap. Earlier, banks were not permitted to offer NRIs more interest than they pay to Indian depositors.
Bankers said lack of opportunity to deploy their resources is the primary reason why lenders are not in a hurry to increase rates.
"As of today, there is not much of credit demand. Our liquidity position is also relatively comfortable. So, we do not have any plans to increase interest rates on NRE deposits. Also, there are different avenues of raising foreign currencies. So, at this moment, we are not looking at increasing our FCNR (B) [foreign currency non-resident] deposit rates," S S Mundra, chairman and managing director of Bank of Baroda, said.
Loan demand has remained muted in the current uncertain macro-economic environment. Credit growth slowed to 15 per cent on a year-on-year basis till July 26 from 17.3 per cent a year earlier.
RBI has also exempted banks from maintaining CRR (cash reserve ratio) and SLR (statutory liquidity ratio) balances on incremental NRE deposits with a maturity of three years and above to encourage lenders in mobilising these deposits more aggressively.
Besides deregulating NRE deposit rates, the central bank has also increased the ceiling on FCNR (B) rates by 100 basis points to Libor plus 400 basis points for three to five years maturity. Both measures will remain effective till November 30. But most bankers said they are not keen to raise non-resident deposit rates now.
"We are presently maintaining a status quo on both NRE and FCNR (B) deposit rates. There is no indication as of now that if we hike these rates, there will a significant increase in flow of funds. We will keep a watch on the market," Shubhalakshmi Panse, chairperson and managing director of Allahabad Bank, said.
The reluctance in increasing rates is also because banks are experiencing a pressure on their margins on account of rise in cost of funds. The central bank's move to increase the marginal standing facility rate by 200 basis points to 10.25 per cent along with limiting banks' borrowing capacity from the liquidity adjustment facility (LAF) has increased the short term rates.
On Wednesday, banks borrowed over Rs 32,000 crore from the MSF facility, which they would have availed at a lower rate from the LAF if there was no cap.
In addition, increase in non-performing assets has put pressure on banks' profitability in terms of higher provisioning and loss of interest income.
Bankers also said that there were other avenues of raising foreign currency funds that work out cheaper than FCNR (B) deposits. "We can always go for a MTN (medium term note) programme through one of our foreign branches if we want. In MTN, we can raise the money in tranches. Also we are sure about the cost, and in the current scenario it will work out cheaper than FCNR (B) deposits," said a banker. Source – Business Standard
Best Regards
Prakash Nair
Certified Personal Financial Advisor (CPFA)
No comments:
Post a Comment