Foreign Banks Caught On The Wrong Foot

The liquidity squeeze forced by the Reserve Bank package to shore the rupee has affected the players in the banking sector differently with the foreign and private banks, which lack a widespread network, coming off the worst.

These banks, which rely heavily on the call market for funds, have been caught up in an asset-liability mismatch in the wake of a surge in call rates during the past 10 days. Their desperation is evident from the high short-term deposit rates they have been offering.

This is in contrast to the Indian commercial banks, blessed with a huge retail network, which have not been forced to scramble desperately for deposits.

 

While the foreign banks like the Bank of America (BoA) offer rates as high as 15 per cent for deposits between 30-90 days, the public sector banks like the State Bank of India and Canara Bank offer rates between 6 and 8 per cent.

Several foreign banks are taking certificates of deposits (CDs) for 90 days at 20-22 per cent. This clearly shows that liquidity is a serious problem for them, an official at the treasury desk of a foreign bank said. Foreign bankers yesterday admitted serious asset-liability mismatch. We do not have access to low-cost deposits the way the public sector banks have. Our lending to the corporate sector are of medium-term maturity. And so we are net borrowers in the call market. Therefore, we have been hit the most, a foreign bank official said.

It is a demand-supply problem. With the CRR up, they are suddenly short of funds. Also the increase in the bank rate has increased rates across the board, with the immediate impact being in the short-term markets. So the foreign banks, which rely greatly on the call market, have been caught in the flare up, a PSU bank official said.

A private sector bank official said: The information I have received is that the increase in the short-term deposit rates have helped most banks to mobilise resources. But with call rates cooling yesterday, sources said there has been a concomitant lowering of short-term deposit rates by some foreign banks. ABN Amro, which on Tuesday offered 17.75 per cent for deposits between 46-60 days, lowered the rates to 13 per cent yesterday, sources said.