Banks’ cost of funds up around 1% YoY on higher deposit, market rates
The cost of funds for banks has risen by around 1 per cent, or 100 bps, YoY, during Q1 FY24 owing to the ongoing repricing of deposits, customer preference for high-yielding fixed deposits, and an increase in market borrowing rates.
The Reserve Bank of India (RBI) has hiked the repo rate by 250 bps since March 2022 to 6.50 per cent. The subsequent repricing in banks’ loans was faster due to the bulk of their portfolios being floating rate or linked to external benchmarks, which led to most banks reporting an improvement in their margins in FY23.
With deposit repricing now catching up, the cost of funds has been rising for lenders. Of the banks that have declared their Q1 earnings so far, the cost of funds were higher by 90–130 bps on year and 20–40 bps sequentially, including mid-sized private banks and small finance banks.
As per the latest RBI data, the weighted average domestic term deposit rate (WADTDR) on outstanding term deposits was 6.47 per cent in June 2023, up from 5.13 per cent in the year-ago period. The WADTDT on fresh term deposits stood at 6.34 per cent in June 2023.
Savings to deposits
In addition to the higher cost of deposits, the increase in overall cost of funds has also been led by retail customers’ shifting their savings to higher-yielding fixed deposits and bulk deposits to take advantage of the higher rates being offered, banks said in their Q1 earnings.
Market borrowing rates for banks have also seen an increase, with rates on banks’ certificates of deposits (CDs) rising to 6.80–8.70 per cent across tenures in Q1 FY24 from 3.95–6.80 per cent in the year-ago period.
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The year-on-year increase in cost of funds for small finance banks was lower given their higher deposit rates since the pandemic,intensified competition for deposit accretion, and traditionally higher market borrowing rates. However, sequentially, these lenders too saw an increase of 25–30 bps in their cost of funds.
With banks guiding for a further increase in their cost of funds, at least over the next two quarters, pressure on margins is expected to continue for some months before stabilising towards the end of the financial year, subject to no further rate hikes by the central bank.