The Hindu Business Line : Banks relying less on term deposits to raise funds

BANKERS refusing to lend may be commonplace. But a bank turning away deposits is an unusual occurrence. Something of this order appears to have happened last fiscal if one goes by the deposit figures of four banks - Punjab & Sind Bank, Andhra Bank, Corporation Bank and UTI Bank. These four banks have actually seen a decline in their term deposits base ranging between 0.6 and 5 per cent.

Term deposits are deposits for periods ranging from 7 days at the lower end to 5 years and above at the higher end. Interest rates on such deposits are generally higher than those offered by banks on low-cost deposits (savings and demand deposits).

On an average, most banks raise about 65 per cent of their funds through such term deposits. At least a part of this comes in the form of bulk deposits (deposits of Rs 1 crore and above) taken from high networth individuals and corporates.

These deposits are a shade costlier for banks - but they don't mind it - given the lesser administrative hassles in terms of time and effort.

Some banks now seem to have begun a conscious effort to minimise their dependence on such bulk deposits. The Chairman and Managing Director of Corporation Bank, Mr Cherian Varghese, said that his bank saw a lower growth in deposits because of a decision not to chase bulk deposits. This view is also mirrored by Mr P. Mukherjee, Senior Vice-President-Treasury of UTI Bank, and the Andhra Bank's Executive Director, Mr R. Balakrishnan, who stated that their banks were returning bulk deposits. The redemption of these bulk deposits could partly explain the negative growth in term deposits of these banks.

The decline in term deposits of these banks represents an extreme form of the strategy now followed by almost all banks - that of growing the base of low-cost deposits and de-emphasising growth in term deposits.

What is new, however, is the zeal exhibited by some public sector banks in their efforts to match private sector banks. In terms of garnering low-cost deposits, private sector banks generally tend to show better performance - mainly because of leveraging technology, especially the use of ATMs and also because of their relatively lower base.

Many public sector banks, while not posting growth rates of the same order because of their higher base, have held their own in the race for such deposits in 2003-04.

But, it is not as though all banks are turning down term deposits. Some have shown a spectacular growth. Syndicate Bank for instance saw its term deposit rise 51 per cent in 2003-04.

The bank's Chairman and Managing Director, Mr Michael Bastian, denies that there was an attempt to raise resources ahead of a possible interest rate hike.

He said, "Banks really don't have much of a choice in this matter. Customers in the rural and semi-urban areas prefer term deposits. We don't operate like foreign or private banks, who, may first lend and then raise the resources of appropriate nature. So we take it when it comes."

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