Indian banks are turning to low-cost deposits, refinancing debt and raising cheap foreign capital to protect margins squeezed by higher interest rates at home-bank officials and analysts

Source: Reuters

India's central bank last month raised interest rates for the seventh time in
less than a year and more rate hikes are on the card to curb stubbornly high
inflation.
State-run lenders Indian Overseas Bank, IDBI Bank and Rural Electrification
Corp (REC) are raising cheaper funds abroad, but most are turning to the
low-cost current account savings account (CASA) deposits.
"Foreign rates are at historical low levels, while domestic rates are high," HD
Khunteta, director of finance at REC, said, explaining the rationale.
Loan growth for most banks have been strong so far in FY11 ending March,
leading to higher proportion of wholesale funding, partly from refinancing
institutions.
"Rather than focusing on balance sheet growth, we focus on churn and fee
income," said Jaideep Iyer, president, financial management at Yes Bank

"We focus on non-interest income such as trade, forex, advisory services with
the same clients. We are chasing more customers so that gives more granularity
to our balance sheet."
Others like IDBI Bank are exploring options to refinance loans and deposits,
shed high-cost bulk deposits and look to overseas borrowing.
IDBI plans to raise $1 billion by September as also Indian Overseas Bank, which
plans to raise a similar amount, half before end-March.
"If refinancing gives us a lower cost, or foreign currency borrowing gives us a
lower cost, we will access those sources rather than deposit sources," said
Melwyn Rego, executive director, IDBI Bank.
LOW-COST DEPOSITS
The focus on low-cost current account savings account (CASA) deposits has also
been rewarding for lenders.
"Cost of deposits is going up but we have been able to bring that down... we
have been able to substitute high cost deposits with lower costs CASA and with
refinancing," said S. Shridhar, chairman and managing director, Central Bank of
India.

CASA share of its deposits increased to 34.9 percent in Oct-Dec from 29.9
percent a year-ago, while its cost of deposits dropped to 5.7 percent from 6.1
percent.

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