Today, we all are living in a time when interest rates on all deposits are running at a lifetime low or nearby lifetime, an investor who has limited time, lack of financial knowledge always wishes to invest in small deposit schemes of banks/governments looking to earn safe and secure interest income on such deposits/ advances made by him to the banks and government.
IDFC First bank is offering an interest rate of 7% per annum on the balances maintained in the saving bank accounts with the bank if the amount is exceeding the prescribed threshold by the bank, in a time where RBI Repo rate is merely 4% and reverse repo rate is 3.35% only, even the 10-year G-Sec yield is trading below than 6% or marginally above than 6% from a long period which makes it very lucrative for the investors.
An investor keeping the money in the saving bank accounts of IDFC First Bank for 7% interest rate should consider the following:
1. History of the Bank: IDFC FIRST Bank Limited was incorporated in October 2014 and the name of the bank underwent a change from ‘IDFC Bank Limited’ (IBL) to ‘IDFC FIRST Bank Limited’ with effect from January 12, 2019, following the merger of Capital First Limited, a non-banking finance company with the bank. The merger of Capital First Limited and its two subsidiaries with IDFC Bank Limited has become effective from December 18, 2018.
2. Saving Bank Account is an unsecured demand deposit: Saving Bank Accounts fall under the category of demand deposits maintained with the bank, it is like an interest-bearing, unsecured loan, repayable on demand given to the bank by the depositor. Being the unsecured loan it doesn’t carry any underlying assets as hypothecation, however, as per the recent amendment in DICGC Act, the Central Government has raised the amount of Insurance from RBI for the deposit holders from Rs.1,00,000 to Rs. 5,00,000 for which banks are required to pay the insurance amount and deposit holders are not going to borne any additional burden. DICGA assures the deposit holders that deposit holders are going to receive the sum assured under the DICGCA, in the event of the bankruptcy of the bank.
3. Recent Downgrade in the Credit Rating of the Bank: Care one of the leading credit rating agency in India furnished it’s latest rating for the long term borrowings of the bank on 9th October 2020 wherein it has downgraded the bank from AA+ to AA. It is a weak rating as compared to other big players of the Industry i.e HDFC Bank, ICICI Bank, and SBI which are having the highest possible rating of AAA. The report highlights the weaknesses existing in the bank, an extract of the report is produced herein below:
i. Relatively lower CASA proportion to total liability compared to peers; the same however is gradually ramping up with good growth over a short period.
ii. The bank reported a net loss of Rs.2,864 crore for FY20 as compared to a net loss of Rs.1,944 crore for FY19 on account of an increase in provisions and write-offs. On account of branch expansion, the bank’s operating expense ratio is higher compared to peers and stood at 3.48% for FY20 compared to 4.07% for FY19. The cost of funds remained high compared to peers at 7.78% for FY20 against 7.11% for FY19. Credit cost (provisions and write-offs/average adjusted assets) has increased substantially from 1.01% as on March 31, 2019, to 2.77% as on March 31, 2020, mainly due to increased provisions on some of the identified stressed accounts identified and write-offs during FY20.
iii. Concentration risk in its wholesale lending portfolio and presence in a high yielding retail segment which may be impacted by the current economic slowdown.
4. Key Financial Parameters of the Bank: Banks are engaged in the business of borrowing the money from depositors/investors and lending the money to the borrowers while lending money to the bank an investor should not ignore the key aspects which he otherwise would have evaluated before making any investments:
5. Reporting the continuous losses: The bank has reported losses in both the financial years 2018-19 and 2019-20, amounted to Rs. (1,944.18 Crores) and Rs. (2,864.21 Crores).
6. Quality of Assets: IDFC first bank inherited the poor quality of assets from IDFC Bank Limited having very large exposure in Infrastructure companies, telecom companies, etc. which have defaulted in the repayment of their outstanding dues ADAG group and Vodafone are examples of the same. The amount written off by the bank due to such NPAs has impacted the financial position of the bank adversely, which may continue to occur in the future due to further write off by the Bank.
7. Selling of Shares by CEO of the Bank: Recently in March 2020, CEO of the Bank disposed of a large quantity of his holding in the bank citing repayment of personal dues.
8. Cost of funds and nature of advances: CASA ratio stands for Current Account Saving Account Ratio concerning the total size of the balance sheet. The bank is improving its CASA ratio but it still lower than other private banks and PSU Banks. The CASA ratio is very important for the bank because it is the cheapest source of money for the bank and reduces the cost of borrowing helping banks to improve it’s margins and overall profitability for the bank.
The bank is offering such higher rate of interest for saving accounts indicating either it is unable to raise funds at a cheap rate of interest or it is disbursing the loans at a higher rate of interest as compared to the peers, the question which remains unanswered is the bank taking higher risk and lending to the corporates having a lower credit rating or spreading it’s loan book in the retail segment to offset the high cost of borrowing.
Concluding Remarks: Retail investors keep their money in saving bank account or term deposits with the bank to park their funds considering it the safest mode of parking the money and can be used by them whenever they need the same. While parking the money in a safe haven, I don’t think one should chase the return and lend the money to those banks which are not having strong financials.
Disclaimer: All information published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult their financial advisor before making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at its own risk.