The Hindu Business Line : `Special' deposits get good response

When a bank offers higher interest rate on deposits than the rest of the market, it could be interpreted as an early indication of trouble that will follow. On the other hand, it could be merely a case where the bank is trying to mop up extra resources to meet a demand for funds at a particular period - something that is termed as "Asset-liability mismatch" in bankerspeak.

Now, we have a phenomenon, for the last two months, where a host of private banks have been offering special interest rates for term deposits of duration between 275 and 400 days. These special rates are significantly higher than the rates offered on regular deposits on either side of the "special term."

ICICI Bank, for instance, offers 8 per cent on a 390-day deposit. If you put your money for 389 days, you get 6.75 per cent. And if you decide to put it anything beyond 391 days up to three years, you would still get only 6.75 per cent.

But why does ICICI Bank need money for 390 days?

Mr Anup Bagchi, General Manager and Head of Retail Liabilities, ICICI Bank refutes any imputation that there could be an asset-liability mismatch. He says, "The bulk of our retail loans (housing, auto, two-wheeler, personal) is well distributed across different tenors."

He says, "We have introduced this product to capture a bigger share of deposits. About 90 per cent of the market is sitting at rates much lesser than 8 per cent. By offering 8 per cent, we are offering an attractive product that competes with small savings and other investment options. We are also trying to change the impression in the minds of the consumer that all fixed deposit products are the same."

Isn't there a risk of customers moving all their deposits to the 390-day deposit and raising the cost of funds for ICICI Bank? He says the risk of that happening is minimal. Besides, he points out, customers also wonder what would happen a year later, if rates were to fall again. So many customers prefer to remain locked into a 3 or 5-year rate.

So how has the response been? Very good, according to Mr Bagchi. But no numbers are forthcoming because the bank is due to announce its results shortly.

Other banks have also come out with their own variants of this "special deposit rates" (see table). They say that they have introduced this so as to preserve their deposit base and not lose out in the race to grab market share. Many of them say the response has been encouraging.

Mr Ananthakrishna, Chairman, Karnataka Bank, says that his bank has been able to get about Rs 10 crore of deposits within one month of introducing a 365-day deposit product. "We are planning to raise Rs 100 crore before March 2007 through this product," he said.

So how long will these deposit rates be in force? ICICI Bank's Mr Bagchi says, "We have had this product for nearly 3 months now. We may close it shortly. We are still evaluating the options."

Other banks also say that this offer is only for a limited period.

More Stories on : Fixed Deposits | Interest Rates | ICICI Bank Ltd

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