The Reserve Bank of India had allowed banks to offer differential rates of interest on large deposits in the slack season credit policy announced in April 1998.

Along with doing away with the differential interest rates, banks also plan to cut interest rates on all term deposit across the board in a bid to discourage US-64 holders to deploy these funds in the banking system. At present, most banks offer 7 per cent for deposits below 90 days. A 50-basis points cut in this slab is expected over the next few days.

"There have been a lot of enquiries from corporates. They want to redeem their US-64 holdings and park funds in bank deposits. We are not encouraging them," Bank of Baroda chairman K Kannan said. Amongpublic sector banks, Bank of Baroda offers lowest rates on term deposits. "Asset liability management is the key to banking operations now. We have to be very careful about the cost of funds," Kannan said.

The move to stop offering differential rates of interest is another bid to go slow on deposit mobilisation. The banking industry has recorded a robust 21.5 per cent growth in deposits on a year-on-year (YoY) basis. The aggregate deposits for the first six months of the current financial year ended at 6,46,006 crore on September 25, 1998 -- up by 9.7 per cent since the beginning of the current fiscal.

Credit offtake, on the other hand, has been tardy in the first half registering a growth of 1.3 per cent. On YoY basis, the growth has been to the tune of 17.3 per cent. "With no signs of credit taking off, we do not want to encourage any further accretion of deposits," a senior banker said.

Most of the deposits have been deployed in government securities and investments in the first half of the financialgrew by 15 per cent while on YoY basis they went up by 18.7 per cent.

Senior bankers said that the US-64 controversy has led to a sudden spurt in deposit growth as investors at this juncture want to stay liquid even at the cost of lower returns from bank deposits.