Large depositors may have to give up hopes of earning a little extra interest income towards the end of the year with a finance ministry diktat forcing banks to cap rates on bulk deposits.
Banks are asked by the government to reduce the share of bulk deposits to below 30%. Banks have agreed to fix a range within which they would operate. A couple of months back it was noticed that banks were offering as much as 13.2% for deposits of up to one year tenure when the prevailing interest rate for an average bank customer was 9-9.5%. As a result of higher interest rates to meet the ever rising credit demand and also meet year end targets, those like Syndicate Bank saw the share of bulk deposits reach 38% of their deposit base.
Even the Indian Banks Association, which raised the issue at its managing committee, conceded that rates were out of alignment with the market benchmarks. IBA has worked out the modalities for fixing the range but the band has not been decided.
It is expected that the state run banks refrain from offering high rates on deposits, there was no assurances that the private banks would fall in line. If private banks offered high interest rates on bulk deposits, the public sector players would be at a disadvantage.
For large depositors, mainly corporate companies and high net worth individuals, bulk deposits, which are usually upwards of a few lakhs were a handy source of additional interest income towards the year end.
Now Banks have changed their policy with banks pushing for normal deposits and reduce their dependence on the high cost bulk deposits. Besides, they are focusing on increasing the number of savings bank and current accounts to generate funds. They are also pushing consumers to revive non-operative bank accounts.
Local bodies, educational institutions and trusts are being contacted to mobilize deposits but banks are not offering higher interest rates. The idea is to spend more time trying to mobilize funds which could also mean deposit mobilization in rural areas.
While Indian Bank offered the lowest interest rates for deposits from companies, Punjab National Bank raised bulk deposits at 13.2%. Barring Indian Bank, all other state run banks offered interest rates of over 11% towards the end of the last financial year to raise deposits.
Aggregate deposits of public sector banks grew 23% to Rs 19,59,306 crore during 2006-07.