KOCHI: Federal Bank is making a strategic shift towards increasing its fixed-rate loans portfolio, a move that aligns with both its asset-liability management (ALM) objectives and the broader interest rate environment.
businessbenchmark.news has, a few days ago, discussed a scenario where home loans signed up at floating rates as low as 8.5 per cent (repo rate of 6.5% + 2% margin) would most probably end up with the respective banks hardly earning anything on such loans in the event of a repo rate cut at the February 5-7 MPC meeting.
It is widely expected that the Monetary Policy Committee (MPC), meeting from February 5 to 7, will vote for a rate cut in the range of 25 to 50 basis points, requiring banks that have signed up floating rate loans to adjust their lending rates downwards accordingly.
While interacting with analysts, Federal Bank management, including the bank’s MD & CEO, KVS Manian, emphasised that transitioning from floating to fixed rates is a structured and ongoing process aimed at improving stability and predictability.
Transitioning key loan segments
A major area of focus for this shift has been the bank’s auto loan segment, where the transition from floating to fixed-rate loans has been completed in a remarkably short time. “What is remarkable is that probably this month, we will do 100 per cent of our business in fixed rate, moving from 100 per cent floating just three months back,” noted Manian.
Beyond auto loans, the bank has also initiated a shift in its small business segment. “In our Business Banking (BUB) segment, we have moved almost 20 per cent of the portfolio to fixed rate,” Manian added. While the entire commercial vehicle (CV) loan book was already on fixed rates, the bank is now exploring opportunities to extend this transition to other lending segments too.
Strategic rationale
The shift towards fixed-rate assets (loans) comes at a time when interest rates may be poised to decline. In such a scenario, fixed-rate lending allows the bank to lock in higher yields, shielding itself from potential margin compression. “In a declining interest rate scenario, that might actually be a better strategy,” the bank’s management pointed out.
Moreover, the move is underpinned by sound asset-liability management (ALM) principles. Banks’ liability book predominantly consists of fixed-rate borrowings, and increasing fixed-rate assets ensures a better balance-sheet match.
“Don’t forget that banks essentially borrow at a fixed rate on the liability side. There is no floating rate borrowing. So fundamentally, fixed-rate assets are a better ALM match for banks,” explained the management.
More fixed-rate lending on horizon
Currently, about 30 per cent of Federal Bank’s overall loan book comprises fixed-rate loans, which is in line with larger banks. However, the bank believes there is room for further expansion.
“We believe there is scope to increase the fixed-rate book in some of these products that we talked about earlier,” the management indicated, hinting at further recalibration in its lending strategy.
