Indian Bank expects the Reserve Bank of India’s new foreign exchange risk reserve requirement to put some pressure on profitability by locking up additional funds that will not earn interest, Managing Director and CEO Binod Kumar said.
Mumbai, October 16 — State-owned lender Indian Bank expects the Reserve Bank of India’s new Foreign Exchange Risk Reserve (FERR) requirement to have an impact on profitability, as banks will need to set aside additional funds against certain foreign exchange derivative transactions.
Indian Bank Managing Director and CEO Binod Kumar said the new norms would not directly affect the bank’s forex income, but maintaining the prescribed reserve could increase costs and weigh on overall profitability.
The RBI announced the new requirement on October 10, along with several other regulatory measures, against the backdrop of significant depreciation in the rupee.
According to the central bank’s FAQs, the FERR requirement will apply only to derivative contracts involving the purchase of foreign currency against the rupee.
The reserve must be maintained at 20% of the rupee-equivalent notional value of each applicable derivative contract.
For example, if a bank enters into a foreign exchange derivative contract worth $10 million at ₹95 per dollar, the notional rupee value would be ₹95 crore. The corresponding FERR requirement would be ₹19 crore.
Kumar said the rule should not have an impact on forex income in the coming quarters.
Indian Bank’s forex income rose 108.12% year-on-year to ₹311 crore in the July-September quarter, compared with ₹149 crore in the same period last year.
On a sequential basis, forex income increased 10.60%. Kumar attributed the strong growth to higher volatility in currency markets amid global uncertainty.
The bank also reduced its credit exposure to the petroleum and coal products sector by 32.97% year-on-year to ₹6,997 crore during the quarter.
Kumar said the decline was due to pricing rather than concerns over the sector, as some public-sector companies were seeking lending rates of around 6.10%, which the bank was unwilling to offer.
As a result, the sector’s share in Indian Bank’s gross advances declined to 1.06% in Q2 FY27 from 1.82% a year earlier.
On the transmission of the RBI’s recent rate hike, Kumar said surplus liquidity in the banking system is currently slowing the pass-through to deposit rates.
He expects deposit-rate transmission to begin towards the end of the third quarter, with the weighted average rise in deposit rates likely to be around 8-9 basis points, depending on market conditions and movements in bulk deposit rates.
