Flows to NRE deposits to rise post RBI move: Federal Bank

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The RBI on Friday freed up interest rates on non-resident external (NRE) accounts and non-resident ordinary rupee (NRO) accounts in a bid to attract dollars. This move is set to have a positive impact on Federal Bank . Speaking to CNBC-TV18, executive director PC John says that they expect flows to NRE deposits to increase.

"With 6.5% interest for NRE term deposits, they will be found to be more attractive by non-residents because there is no taxability in NRE deposits and full repatriation takes place," he explained. He goes on to say that this will not affect the net interest margins of the bank. "We stand by our guidance of NIM around 3.7-3.75%."

Federal Bank has already hiked its interest on NRE term deposits to 6.5% from 3.82% previously.

Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.

Q: How much do you think this scheme can attract and are you ready with some attractive products already?

A: We have already announced an increase in the term deposit rates for one year. We have increased NRE term deposits to 6.5% already.

Q: How much was it at LIBOR +100?

A: It was 3.82% earlier based on the cap fixed deposit by RBI.

Q: At this point in time, how much is your total deposits coming from NRE and NRO?

A: Total deposits is more than Rs 10,000 crore outstanding. But the increase in interest rate is applicable only for incremental deposits and not for the existing deposits.

Q: What kind of hit on margins would you expect because of a potential re-pricing?

A: We see this as an opportunity rather than a challenge because as you said lot of re-pricing will happen in the days to come. We expect flows to NRI deposits to be substantially higher.

In the last few years, we saw an increase in the rate of growth of NRO deposits because NRO deposits attract the interest rates as applicable to resident deposits. For example, one year NRO deposit carries a rate of 9.75% whereas the new rate announced for NRE deposit is 6.5%. Now, 6.5% for NRE term deposits will be found to be more attractive by non-residents because there is no taxability in NRE deposits and full repatriation takes place.

Q: Have you done some kind of a dipstick survey? Are your clients interested?

A: Yes we have and the feedback we have got is that that it will be appreciated by the market.

Q: So, what is your target? How much may your NRE deposits increase by?

A: Already this year we have seen a growth of more than 20%. With the revision in the interest rates on NRE deposits, we expect the growth to be substantially higher. We cannot say what will be the exact rate of growth, but it is expected to be substantially higher.

Q: You would be aware that the RBI has undertaken this move to get in dollars and alleviate the pressure of the rupee. Do you think it will really serve its purpose and that industry wide there could be a significant dollar inflow?

A: Of course the inflows to the country will increase; that is needed at the moment and that would happen.

Q: Do you have any calculations in mind on how much this could attract based on the current client profile and what they could get in?

A: You cannot predict what exactly will be the quantum of inflows or the rate of growth. But definitely this will help in increasing the flows to great extent.

Q: What is the current loan demand or loan growth rate at Federal Bank? Do you think it will get somewhat subdued by the year end because of all the slowdown stories we hear?

A: Considering the adverse external environment, we are not very aggressive about credit expansion, but still we expect about 15-17% growth. We are becoming very selective in credit growth and that too only for quality credit growth. For example, we are growing our gold loan, which is a very safe portfolio with attractive returns, comparatively highly rated corporates. We are not very aggressive on the credit expansion considering the external environment is not very favourable.

Q: You are pretty aggressively asking for money through deposits?

A: NRE deposits which will come at a higher rate of 6.5% that will be used for substituting the high cost deposits for which the present rate is 9.5 or 9.75%.

Q: So what do you think you will do by way of net interest margins in H2 of the year?

A: Net interest margin for the current year is expected to be around 3.7-3.75%. We stand by the same guidance. On account of this NRE, we are not expecting any reduction in the margin.