Glossarytaught in M5.01, M5.02
Cost of funds
Also called cost of deposits, funding cost.
The average rate a lender pays for the money it lends out.
A bank paying ₹2,450 crore on ₹55,000 crore of deposits and borrowings has a cost of funds of 4.45%.
For a bank the figure is driven by the deposit mix, and low-cost current and savings balances are the reason it varies so much between institutions. For most non-bank lenders there are no deposits, so the cost is set by wholesale markets and moves with the credit cycle and with the company's own rating; the few deposit-taking NBFCs and housing finance companies also raise public deposits, under tighter rules than banks.
That difference is the structural weakness of the non-bank model. Funding cost rises exactly when credit quality deteriorates.
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