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George Cherian
Mumbai, November 12: An ever increasing pressure on spreads has forced banks to start slashing interest rates on term deposits. Deposit growth has been far outstripping the growth in credit offtake during the current fiscal, leaving banks with little choice but to make their deposit rates unattractive.
IndusInd Bank and IDBI Bank have taken the lead by reducing interest rates on their term deposits by as much as 200 basis points. The bank has announced a reduction in interest rates on domestic term deposits for maturities of less than a year. The steepest reduction has been on the 31-45 days maturity period, the interest rate of which has been reduced by 200 basis points to 6 per cent.
IDBI Bank has kept interest rates on maturities of 1-5 years at the old levels. Interest rates on NRE and NRNR deposits have also been reduced by 50 basis points for maturities of six months to one year. The bank has kept rates on longer maturities at the same levels.
IndusInd Bank has slashed interest rates on termdeposits by 50-100 basis points. On deposits of 15-30 days, the bank has reduced the interest rate by 100 basis points for all sizes of deposits while for deposits of 91-180 days, rates have been reduced by 50 basis points. The revised rates of both banks are effective from November 9, 1998.
Other banks have said that they will review their deposit rates soon. "Depending on the market trend, we will revise our rates. Deposit rates can only go down now," said Pradip Pain, executive director of Times Bank. HDFC Bank has however said that it does not have any immediate plans to revise rates. The bank's cost of funds are currently the lowest (8-9 per cent) among the new private banks, and it has not been facing much problem with deployment of resources due to its presence in retail banking activities.
The spread of all banks put together, declined from 3.22 per cent in 1996-97 to 2.95 per cent in 1997-98. This was mainly due to the increase in interest income (10.9 per cent) being surpassed by the increasein interest expenditure (12.2 per cent), due largely to higher interest paid on bank term deposits and the collapsing of term deposits to shorter maturities.
While the aggregate deposits in the banking system during the current year grew by 11.5 per cent (Rs 69,828 crore), bank credit grew by only 4 per cent (Rs 13,091 crore). This has left banks with huge surplus funds that have had to be parked in low-yielding government securities. Bank investments during the current fiscal increased by 11.3 per cent (Rs 24,823 crore) over the March 1998 level.
INSIGHT
Funds parked in gilts
Deposits have been growing at over 21 per cent, while growth in bank credit has been much slower. Banks have accordingly been forced to park funds in government securities, with the result that spreads are under considerable pressure. An developed countries, banks seek out assets and then acquire the liabilities to fund them, via the inter-bank market. In the absence of a term money market, most banks in Indiaacquire the liabilities first and then hunt around for a suitable asset. Lowering returns on deposits is therefore necessary to preserve spreads.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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