Banking - Deregulation of NRE/NRO deposit rates - limited near term impact; Edelweiss

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Over the past few days, leading banks have raised NRE term deposit rates by 450bps-550bps to 8.25%-9.25% in response to the recently announced deregulation of NRE/NRO deposit rates. We believe structural upward movement in non-resident rates will impact banks funding costs (particularly regional banks like Federal, South Indian, etc which have relatively higher proportion of these deposits). However, any adverse impact on funding cost may not be immediate as currently rates have been revised significantly only for NRE term deposits (constituting 2-3% of the total deposits for Federal and South Indian Bank). The recent rate hike for NRE term deposits by leading banks implies that this source is no longer a low cost deposit option. Moreover, once savings deposit rates on domestic front is revised, we will see NRE/NRO savings deposit rates also following suit.

Leading banks raise NRE TD rates to 8.25%-9.25%

RBI recently deregulated interest rates on NRE (Non-resident External) savings and term deposits (TD) (maturity over one year) and NRO (Ordinary Non-Resident) savings deposits. NRO term deposits were already deregulated and FCNR deposit rate continues to be regulated. Over the past few days, leading banks like SBI and PNB among others have increased NRE TD rates by ~450bps-550bps to 8.25%-9.25% for maturity of one to two years (now comparable with domestic TD rates). Since rates for non-resident (NR) deposits cannot be higher than domestic rates, NR saving rates though deregulated remain unchanged at 4%. However, we believe that once savings deposit rates on domestic front get revised, we will see NRE/NRO savings deposit rates also being revised upwards. Rupee depreciation coupled with attractive rates now on offer will witness significant inflows under these channels (although on a small base) for the banking industry.

Limited near term impact; structural long term implications

At an industry level, NR deposits constitute only 4.3% of the total deposits (as on FY11) and impact of deregulation will not be more than 10bps on cost of funds. The fact that revised higher rates are applicable for fresh deposits also comes to the immediate aid. Besides, current regulations do not allow interest payment if TDs are withdrawn before a year; this will prohibit depositors from withdrawing existing TDs.

For Federal Bank and South Indian Bank with NR deposits forming 20% and 13% of total deposits respectively, the impact of deregulation can be 20-25bps on funding cost over a medium term (assuming 200bps increase in savings rate). While the near term impact for these regional banks is limited at 10-12bps due to rate increase on NRE TD (forming ~2.3% of total deposits).  Any structural rise in savings rate for NR deposits (following hike in domestic savings rate) can impact their funding cost to the tune of 10-15bps.