The Bank would like to avoid discontinuation of the indices on short notice, which could occur if there were a further drop in the number of financial institutions eligible to provide cost of funds
If the rewards-based checking product is structured correctly, the cost of funds
discount stays fairly stable as a percentage, meaning the total savings versus the alternative funding source dramatically increases as rates rise.
Banks use marginal cost of funds
when there is sufficient liquidity available at that rate to fund a reasonable proportion of the asset portfolio.Aditya PuriMD and CEO, HDFC Bank
The group has also suggested that banks move towards a new system of computing the base rate on the basis of marginal cost of funds
instead of the present system of using the weighted average cost of funds
This is significant as it means that further lending will need to be financed through costlier deposits and hence increase cost of funds
. This supports our view that net interest margins will continue to be under pressure in the short-term.
He added he could not rule out further reductions in home loans but it would depend on deposit rates and the cost of funds
While other variables, such as the cost of equity, profit margins and the risks associated with lending will also have a bearing on the interest rates customers are charged, the cost of funds
will be major factor.
He said: "Over the last year the cost of funds
at which we need to borrow at to fund our mortgage commitments has risen considerably.
To examine and compare various elements of cost of funds
and return on funds of various categories of banks.
As a further outcome of sluggish lending, Colby said "looking at cost of funds
versus marginal investment return, if you had to put it overnight in a corporate, you're losing money." Based on first-quarter data, the yield on average loans was 6.13% or 480 basis points above cost of funds
, he explained.
Reduction in cost of funds
lead to an improvement in NIMs, said M V Nair, CMD, Union Bank of India.
Trichet said the ECB would index the cost of funds
at its next - and final - 12-month liquidity operation on December 16 to its main policy rate, linking it to the average minimum cost of funds
in its regular weekly loans to banks.