Cost of Funds

A bank's business is simple at its core: borrow money cheaply, lend it out at a higher rate, and pocket the difference. The price it pays to *borrow* is its Cost of Funds (CoF) — the weighted-average interest rate it pays across all its funding sources. It is the single most important driver of a lender's profitability and the rates it can offer you.

What Goes Into It

A bank raises money from several pools, each with a different cost: savings and current account deposits (CASA), which are very cheap; fixed/term deposits, which cost more; borrowings from the market and other banks; and bonds it issues. The weighted average of these, factoring how much comes from each source, gives the cost of funds. A bank with a high CASA ratio — lots of low-cost savings and current deposits — enjoys a structurally lower cost of funds and a competitive edge, which is why analysts prize banks like HDFC Bank and ICICI for their strong CASA franchises.

The Link to Lending Rates and Margins

Cost of funds feeds directly into how a bank prices loans. The gap between what a bank earns on loans and what it pays on funds is its Net Interest Margin (NIM) — the heartbeat of bank profitability. Indian banks now price many loans against external benchmarks (the EBLR, often tied to the RBI repo rate) for retail loans, while others use the MCLR, which is influenced by the cost of funds. When the RBI raises rates, deposit costs eventually climb, lifting CoF; when it cuts, funding gets cheaper over time.

Why Investors Watch It

For anyone analysing bank or NBFC stocks, cost of funds is a make-or-break metric. NBFCs, which lack deposit access and rely on market borrowing and bank loans, are especially sensitive — a rise in their cost of funds can squeeze margins hard, while a strong credit rating lets them borrow cheaper and lend more profitably. Track the trend in CoF alongside NIM: a lender keeping funding costs low while maintaining yields is a quality franchise. Cost of funds, quietly, is where a bank's competitive advantage is won or lost.