Indian Bank sees impact on its profitability due to RBI's forex risk reserve requirement

Stateowned Indian Bank managing director and chief executive officer Binod Kumar on Friday said the Reserve Bank of India RBI new foreign exchange risk reserve FERR requirement could impact the public sector lenders profitability according to news agency PTIHe said this is because the bank will have to lock in additional funds without attracting any interest earningsThe 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 Kumar told PTIRBI forex measuresThe central bank on October 10 had announced several regulatory measures including the introduction of FERR to stem the significant rupee depreciation Since the intervention the domestic currency has started to gain against the US dollarThe apex bank had clarified that new requirements related to the foreign exchange reserve ratio apply only to derivative contracts involving the purchase of foreign currency against the rupeeIt said FERR shall equal 20 per cent of the rupee equivalent of the notional amount of each applicable derivative contract For instance for a derivative contract with a notional amount of USD 10 million against rupee undertaken at a contracted rate of Rs 95 per USD the notional amount is Rs 95 crore The applicable FERR shall be Rs 19 croreIndian Banks forex incomeAccording to the banks investor presentation in the September quarter this financial year the Chennaibased lenders forex income increased by 10812 per cent to Rs 311 crore from Rs 149 crore in the yearago period On a sequential basis it increased by 1060 per cent from Rs 281 croreKumar attributed the growth in forex income to fluctuations in the currency market due to global uncertaintyIncome will come from volatility There was good volatility so that helpedDeposit rate hikesThe RBI had earlier this month increased its benchmark lending rate or repo rate to 55 per cent and the bank had revised its lending rate in line with thisOn the deposit rates Kumar said that there is surplus liquidity in the system and the rate hike will start happening at the end of the third quarterWe 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 89 basis points he saidCredit to petroleum and coal sector reducedDuring the quarter ended September 30 the bank had reduced the credit towards petroleum and coal products by 3297 per cent yearonyear to Rs 6997 crore Kumar said this was due to the pricing issueA couple of public sector undertakings were seeking very competitive rates of around 610 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 saidWith the reduction of credit to petroleum and coal products this sectors share of gross advances decreased to 106 per cent in Q2FY27 from 182 per cent in the same quarter last year according to PTIWith inputs from PTI