Banks were turning to low-cost deposits, refinancing debt and raising cheap foreign capital to protect margins squeezed by higher interest rates at home, bank officials and analysts said.
Last month, the Reserve Bank of India (RBI) raised interest rates for the seventh time in less than a year and more increases are on the card to curb the stubbornly-high inflation.
State-run lenders Indian Overseas Bank (IOB), IDBI Bank and Rural Electrification Corp (REC) are raising cheaper funds abroad, but most are turning to the low-cost current and savings account (Casa) deposits.
"Foreign rates are at historical low levels, while domestic rates are high," said HD Khunteta, director (finance), REC.
Loan growth for most banks has been strong so far in this financial year, leading to a higher proportion of wholesale funding, partly from refinancing institutions.
"Rather than focusing on balance sheet growth, we focus on churn and fee-income," said Jaideep Iyer, president (financial management), Yes Bank
"We focus on non-interest income such as trade, forex, advisory services with the same clients. We are chasing more customers, so that gives more granularity to our balance sheet."
Others like IDBI Bank are exploring options to refinance loans and deposits, shed high-cost bulk deposits and overseas borrowing.
IDBI plans to raise $1 billion by September. IOB also plans to raise a similar amount half before March-end.
"If refinancing or foreign currency borrowing gives us lower cost, we will access those sources rather than deposit sources," said Melwyn Rego, executive director, IDBI Bank.
The focus on low-cost casa deposits has also been rewarding for lenders. The cost of deposits is going up but we have been able to bring that down...we have been able to substitute high-cost deposits with lower costs casa and refinancing," said S Shridhar, chairman and managing director, Central Bank of India. The casa share of its deposits increased to 34.9 per cent in the December quarter, from 29.9 per cent a year-ago, while the cost of deposits dropped to 5.7 per cent from 6.1 per cent.
Most mid-sized banks are targeting casa of 34-35 per cent over the next two years, in line with the industry average.
"Margins will be under pressure for mid-cap banks but what we have to look at is how much will margins come down, specially for those with lower casa ratios," said Vaibhav Agarwal, sector analyst, Angel Broking.
Agarwal recommends United Bank of India, J&K Bank, Dena Bank and IOB amongst the mid-cap banks due to their "dirt cheap valuations and reasonably good casa ratio."