The Hindu Business Line : Federal Bank sees rate gains from renewal of NRI deposits

FEDERAL Bank expects the average cost of deposits to come down by nearly 2 percentage points in 2004-05, as a big chunk of NRI deposits will mature that year and will be priced down upon renewal.

The Kerala-based bank has NRI deposits of around Rs 4,600 crore. Of this, Rs 1,800 crore of deposits are to mature next year. As an industry thumb rule, 62 per cent of NRI deposits are renewed every year.

Applying that thumb rule, some Rs 1,080 crore of deposits would come up for renewal, at lower rates of interest.

The bank's Chairman, Mr K.P. Padmakumar, told Business Line today that he expected the average cost of deposits to come down from 6.45 per cent as at end-December 2003 to 4.65 per cent as at end-March 2004 .

Federal Bank has total deposits of about Rs 12,000 crore. A saving of 1.8 percentage points should then translate to a gain of Rs 216 crore.

Mr Padmakumar said that the bank had introduced a couple of operations that would bring in non-fund based income.

One is trading in derivatives, or, simply taking a bet on interest rate movements. For the first time, the bank entered into interest rate swaps this year, on amounts that total Rs 6,000 crore.

"We lost in a few deals, gained in some, but on the net we have made a profit," Mr Padmakumar said. The gains would be reflected in the profit and loss account.

Second, Federal Bank tied up with 46 of the 52 Kerala-based urban co-operative banks, to train them in trading in G-Secs.

Once the co-operative banks began to take interest in trading in securities actively (rather than hold them for SLR purposes), they got Federal Bank to do the trading on their behalf. For this they had to open accounts with Federal Bank.

This resulted in the bank getting current account float funds of Rs 16 crore, on which it pays no interest.

Besides, for all the treasury trading operations, the bank charges a fee, which adds to its non-fund income. Mr Padmakumar did not want to disclose the fees earned, pending finalisation of accounts.

He said in the current year, the bank's credit increased by about 23 per cent, or by about Rs 1,460 crore to Rs 7,800 crore.

Of the incremental loans, about Rs 700 crore went to the corporate sector and another Rs 160 crore to the housing sector.

Close to buying other banks' branches

CHENNAI: Federal Bank is close to acquiring "five or six" branches of other banks. An offer to the selling bank(s) has been made and "it could happen even the day after tomorrow," the Chairman of the bank, Mr K.P. Padmakumar, told Business Line today.

Last year, the bank tookover the Muddumada branch of the Dhanalakshmi Bank and it turned out to be a happy experience. The branch had a total business of Rs 4 crore.

There was no premium paid - Federal Bank took over the loan assets of the branch and paid only the face value of liabilities (deposits). But it was a gain because "we added about 600 depositors and 200 borrowers".

With that good experience at the back of its mind, the Federal Bank now intends to buy a few more branches.

Mr Padmakumar said the bank could either takeover all the assets and liabilities as well as the branch infrastructure, or only the assets and liabilities. In either case, the branch staff will not be taken over.