Fed Bank sees deposits up 30-35% post NRI deposit cap hike

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The Reserve Bank of India raised interest rates on non-resident rupee deposits between one year and three years to 275 bps above London Interbank Offered Rate (LIBOR), up from 175 bps. Federal Bank is one of the banks with a large number of non-resident Indian (NRI) deposits. CNBC-TV18 catches up with Shyam Shrinivasan, managing director and chief executive officer of the bank to get his perspective of business the hike.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: With the recent increase in the cap or what you can pay NRI depositors, have you raised rates and what does that do to your margins?

A: The rates have gone up both on Non-Resident External (NRE) deposits and Foreign Currency Non-Residential (FCNR). We have seen a very handsome increase in flow this last quarter, largely driven by where the rupee is. What it will do to our margins is too early to say, but the NRE deposit per se is a very attractive channel. I do want to see the FCNR grow because overall margin is a function of what we can do with those FCNR deposits.

Q: Even FCNR cap has been raised?

A: Yes, it has, it's been raised by 25 bps.

Q: So overall, how much of increase in deposit flow are you expecting for your bank?

A: If you look at current flows in the last one quarter and keep that as reference point, we have increased almost 30-35% and our daily remittance volumes have gone up substantially. I would like to see that cross 40% and I think it's possible.

Q: It comes at a slightly higher cost. How much did you raise rates on both these products?

A: Both, we have gone to the mandated cap. NRE is at LIBOR plus 275 bps and FCNR is LIBOR plus 125 bps and we are at the peak of what is acceptable rate.

Q: What will your margins be by the end of the year you think?

A: I don't see this impacting overall NIMs substantially; our NIM guidance for the year has been 370-375 bps, last quarter was 378 bps and it maybe would be 370 bps thereabout this year.

Q: What about savings rates, the domestic accounts, a couple of competition have raised rates?

A: The market is going through a price discovery; we haven't raised rates and we will be competitive certainly.

Q: No plans immediately to do that?

A: No, we are not targeting anything just yet.

Q: What is the overall loan growth looking like in that case?

A: The first half, particularly second quarter, was quite good. We have been giving guidance of overall advances growth at around 18-20%. I would still hold that number as quite possible.

Q: What do you expect by way of NPL performance?

A: You saw our Q2 come down on the net NPA, and I would like to keep that trend going. The external environment is quite tough, but we are well on course to deliver the continued improvement.

Q: What are you looking at in terms of slippages in second half vis-à-vis the first half?

A: The first half for us was two different experiences in both the quarters. Q1 was slightly higher driven by some internal challenges and Q2 was much better. So the overall H2 number should be very similar to the H1 number, only that the mix maybe more equal within the two quarters of the second half. So I don't see a massive shift in that number.