State-owned lender Indian Bank is likely to see an impact on its profitability due to the Reserve Bank’s new Foreign Exchange Risk Reserve (FERR) requirement, which will lock in additional funds without any interest earnings, a top official of the bank said on Friday.
“The new norms will not directly affect forex income. However, the requirement to maintain a reserve of 20 per cent of the notional value of certain forex transactions could increase costs, which may impact overall profitability,” Binod Kumar, managing director and chief executive officer of Indian Bank, said.
The Reserve Bank of India (RBI) announced several regulatory measures, including the introduction of FERR, on October 10, against the backdrop of significant rupee depreciation. Since then, the domestic currency has strengthened against the US dollar.
The Reserve Bank said in a detailed set of FAQs that new requirements related to the foreign exchange reserve ratio apply only to derivative contracts involving the purchase of foreign currency against the rupee.
The central bank said FERR shall equal 20 per cent of the INR equivalent of the notional amount of each applicable derivative contract. For instance, for a derivative contract with a notional amount of $10 million against INR undertaken at a contracted rate of Rs 95 per USD, the notional amount is Rs 95 crore. The applicable FERR shall be Rs 19 crore.
Kumar said that the new norms will not have any impact on the forex income in the upcoming quarters.
In July-September, the bank’s forex income increased by 108.12 per cent to Rs 311 crore from Rs 149 crore in the year-ago period. On a sequential basis, it increased by 10.60 per cent, according to the bank’s investor presentation.
Kumar attributed the sharp rise in forex income to higher volatility in the currency market due to global uncertainty. “Income will come from volatility. There was good volatility, so that helped.”
During the reporting quarter, the bank has reduced the credit towards petroleum and coal products by 32.97 per cent year-on-year to Rs 6,997 crore, which Kumar attributed to the pricing issue.
“A couple of public sector undertakings were seeking very competitive rates of around 6.10 per cent, which we were not willing to offer. Consequently, the exposure declined. The reduction is not related to any concerns about the sector,” Kumar said.
With the reduction of credit to petroleum and coal products, this sector’s share of gross advances decreased to 1.06 per cent in Q2FY27, from 1.82 per cent in the same quarter last year.
Regarding the transmission of the RBI’s rate hike, Kumar said there is currently surplus liquidity in the market. Transmission to deposit rates will take place once this surplus liquidity dries up. “We expect it to begin towards the end of the third quarter.
“However, the extent of transmission will depend on market conditions and how bulk deposit rates move. Retail term deposit rates will also respond accordingly. The transmission may not be complete initially, but we expect the weighted average increase in deposit rates to be around 8-9 basis points,” he added.