Home Market Lenders expect fall in cost of funds

Lenders expect fall in cost of funds


MUMBAI: Cost of funds for banks, especially those in private sector dependent on wholesale deposits, could drop this quarter as they dont need to borrow to meet mandatory bond investments under the Basel III rules. The impact already has been seen in the one-year certificate of deposit (CD) market where interest rates dropped to 8.02 per cent after the RBI monetary policy on Wednesday, from 8.22 per cent on Tuesday, a level not seen since February 2016.

The fall in the three-month CD rates was steeper with the yield on these deposits falling a whopping 50 basis points in a day to 7.25 per cent, the lowest level since April 2016.

Fast-growing private sector banks used these instruments to borrow and invest in government paper to fulfil their high quality liquid assets (HQLAs) investments norms under Basel III.

“The RBI relaxation will benefit banks like us which had to borrow and invest in these HQLR securities. We have around Rs 50,000 crore of deposits and a 2 per cent exemption will help save us Rs 1,000 crore because we do not need to borrow or invest in securities we would not need,” said Jaideep Iyer, head of finance, at RBL Bank.

In its monetary policy review, the RBI allowed banks to consider a further 2 per cent of their government security investments as HQLAs under the Basel III calculations, reducing the pressure on banks to raise shortterm funds to invest in these regulatorily mandatory investments. Banks have to mandatorily invest 19.5 per cent of their total deposits into government securities known as statutory liquidity ratio. So far, 11 per cent of these investments was considered HQLR which will now increase to 13 per cent, reducing banks need to buy government securities by that extent.

Out of the total Rs 114 lakh crore deposits, around 30 per cent, or about Rs 34 lakh crore, are with private sector banks. A 2 per cent leeway could potentially free up about Rs 70,000 crore for these lenders. “For us it means that we dont need to buy more securities to make up for HQLR. Our calculations show we will benefit by around Rs 2,000 crore,” said Ashutosh Khajuria, executive director at Federal Bank.

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