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Part - IV

Banks have also been affected by the higher reduction in yields on their investments in G-Secs vis-à-vis their term deposit costs. Historically*, banks enjoyed a positive spread on an incremental basis of about 150 bps on the yield on their investments in G-Secs (of 8-10 year maturity) over the cost of term deposits (2-3 year maturity). This spread has been wiped out since the last 18 months, partly because of the high liquidity in the money market and partly due to the relatively higher decline in yields on G-Secs over term deposit costs. Thus, the advantage that banks enjoyed over NBFCs due to the spread between term deposit rates and risk-free investments (G-Secs) has fallen by around 150 bps (denoted as YY).

The overall reduction in the banks’ gross spreads because of the twin factors of declining interest rates and lower spreads on G-Sec yields is about 297 bps (expressed as ZZ=XX+YY).

Incremental all-inclusive resources costs of highlyrated NBFCs now lower than that of banks

In the past, NBFCs had a significant disadvantage against banks because of the considerable spread that the latter earned on their deployed assets versus their deposit costs. With declining interest rates and falling spreads over G-Sec yields, however, this funding cost advantage has been wiped out. This is after factoring in the reduction in the negative carry that banks bear owing to their statutory liquidity ratio (SLR) and cash reserve ratio (CRR) investments, which has also fallen because of the decline in opportunity cost of the funds thus deployed. This and the reduction in the banks’ operational costs have brought down their allinclusive cost of funding.

CRISIL’s all-inclusive funding cost analysis for banks factors the negative carry incurred by banks on account of the regulatory investments in CRR and SLR and also theoperating costs incurred for mobilizing their deposits. On an all-inclusive basis, CRISIL estimates that highly rated NBFCs have a lower cost of resources than banks today on an incremental basis (see Table 2). In contrast, they faced a 182 bps disadvantage earlier. This has contributed in no mean measure in strengthening the business model of these NBFCs.

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* CRISIL’s estimates of the scenario as it existed in 1999-2000

Source: CRISIL