Rajat Monga of Yes Bank expects foreign currency non-resident deposits to draw in another USD 15-20 billion. The private sector lender has garnered USD 255 million via dual currency multi-tenure syndicated loans.
Speaking to CNBC-TV18, he said Reserve Bank’s (RBI) measures to promote currency swaps have helped the bank lower its cost of funds (or interest costs).
“The cost of funds are relatively beneficial as the swapped cost of these dollars would be between 8.25 percent and 8.50 percent in rupee terms. In the current liquidity environment, it is definitely cheaper than the CD rates as one year CD rate is trading at about 10.25 percent. Hence, the swapped dollars are a good 1.75 to 2 percent cheaper, given the benefit that RBI is also bundling with the swaps already,” he highlights.
Below is the edited transcript of Monga’s interview to CNBC-TV18.
Q: This is the money that you can swap with the Reserve Bank of India (RBI) at 100 basis points (bps) below the market rate?
A: Yes, this is potentially available for swapping with the RBI. It is in the 100 percent of tier-I limit which RBI has currently increased for banks to raise money from their overseas correspondents. So, this should be eligible for the RBI swap facility.
Q: Overall does this reduce the cost of money for you for this quarter and by how much?
A: This quarter is almost over. So even if we draw this facility completely, it will have only a very small impact but yes, the cost of funds are relatively beneficial so the swapped cost of these dollars would be about between 8.25 percent and 8.50 percent in rupee terms. In the current liquidity environment, it is definitely cheaper than the CD rates. One year CD rate is trading at about 10.25 percent. So, it is a good 1.75 to 2 percent cheaper on that front, given the benefit that RBI is also bundling with the swaps already.
Q: So over and above this USD 255 million any more debt that you are looking to raise within this calendar year itself?
A: It will not be in the form of a syndicated loan like this one is. This one is a broader based loan offering where there are 10-15 banks that are participating. This loan will also be syndicated further to other banks. So, this is more like an annual programme in terms of the syndicated loan facility that the bank would engage in. However, for the rest of the year, we would look at more bilateral transaction so we will talk to other banks definitely in terms of also seeing if we can use the expanded window from RBI. The RBI window is a little bit restrictive given its three-year minimum tenure, which conflicts with the FCNR(B) product as well but yes, in any case this should be worth an effort in the bilateral markets as well.
Q: What has been the response for those FCNR(B) products, what is the industry doing and what are you doing, are you trying to get money in that FCNR accounts?
A: Yes, the attempt is reasonably on the positive side to get money lining up in that product structure as well. It is a lot of numbers floating around. We haven’t seen the tangibility of the flows yet. I think people are talking about anywhere between USD 10-20 billion that the industry should be able to mobilise from the product as such. I think the discussion is revolving more around how there could be a leverage kind of layer beneath the NRI participation in this product as well. So I think the product has a very wide range of possibilities in terms of quantity outcomes. If the leverage product works out, it could be very well at the top end of the range that the money could be procured.
Q: What could the impact be of the RBI measures on the net interest margins (NIMs) so far, you have held it at about 3 percent but getting into Q2 – Q3 what do you think the ballpark range could be?
A: NIMs are in a narrow range at this point in time. As far as Q2 is concerned, it is more than 70-80 percent passed. So, the bank got an opportunity to increase the loan pricing so base rates were increased on August 1. Infact, the margins would have slightly increased at the time of increase in the base rates but have since progressively been coming off as the incremental cost of funds has remained high. So, the bank has a fairly substantial floating rate structure on the loan book and for example, this facility itself will help increase margins by anywhere between 3 bps and 5 bps.
Q: That will show up more next quarter, right?
A: Yes, so while there is some more pent-up pressure on margins as far as next quarter is concerned and therefore this facility will also have a little bit of mitigation of that impact. Then there is always an option of looking at loan pricing all over again.
Q: But now in this quarter will you be able to manage 3 percent or will it be a little south of 3 percent?
A: It is in that range where I myself don’t have a very perfect idea but I would hazard that the error would be on the downside on estimation.
Q: What kind of deposits could the industry target over the next few months because of this FCNR swap, any ballpark figure that you would be working with?
A: Industry figures is a little bit a function of how the leverage layer begins to work its way. If that works out, USD 15-20 billion is a done deal in that respect.