[T.S.R:18262] Banks-CRR Cut, Increased NRE Deposits Structurally Positive

 

Over the past few days, leading banks have raised NRE term deposit rates

by 450bps

‐550bps to 8.25%‐9.25% in response to the recently announced

deregulation of NRE/NRO deposit rates. We believe structural upward

movement in non‐resident rates will impact banks funding costs

(particularly regional banks like Federal, South Indian, etc which have

relatively higher proportion of these deposits). However, any adverse

impact on funding cost may not be immediate as currently rates have

been revised significantly only for NRE term deposits (constituting 2‐3% of

the total deposits for Federal and South Indian Bank). The recent rate hike

for NRE term deposits by leading banks implies that this source is no

longer a low cost deposit option. Moreover, once savings deposit rates on

domestic front is revised, we will see NRE/NRO savings deposit rates also

following suit.

Leading banks raise NRE TD rates to 8.25%

‐9.25%

RBI recently deregulated interest rates on NRE (Non

‐resident External) savings and

term deposits (TD) (maturity over one year) and NRO (Ordinary Non‐Resident) savings

deposits. NRO term deposits were already deregulated and FCNR deposit rate

continues to be regulated. Over the past few days, leading banks like SBI and PNB

among others have increased NRE TD rates by ~450bps‐550bps to 8.25%‐9.25% for

maturity of one to two years (now comparable with domestic TD rates). Since rates for

non‐resident (NR) deposits cannot be higher than domestic rates, NR saving rates

though deregulated remain unchanged at 4%. However, we believe that once savings

deposit rates on domestic front get revised, we will see NRE/NRO savings deposit rates

also being revised upwards. Rupee depreciation coupled with attractive rates now on

offer will witness significant inflows under these channels (although on a small base) for

the banking industry.

Limited near term impact; structural long term implications

At an industry level, NR deposits constitute only 4.3% of the total deposits (as on FY11)

and impact of deregulation will not be more than 10bps on cost of funds. The fact that

revised higher rates are applicable for fresh deposits also comes to the immediate aid.

Besides, current regulations do not allow interest payment if TDs are withdrawn before

a year; this will prohibit depositors from withdrawing existing TDs.

For Federal Bank and South Indian Bank with NR deposits forming 20% and 13% of total

deposits respectively, the impact of deregulation can be 20

‐25bps on funding cost over

a medium term (assuming 200bps increase in savings rate). While the near term impact

for these regional banks is limited at 10

‐12bps due to rate increase on NRE TD (forming

~2.3% of total deposits). Any structural rise in savings rate for NR deposits (following

hike in domestic savings rate) can impact their funding cost to the tune of 10

‐15bps

 

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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