The Hindu Business Line : Bank deposit rates on the rise

Comfortable hike
Most banks are still enjoying an interest spread of over 3 per cent
This makes it easy for the banks to hike deposit interest rates, if need be.

Chennai , Nov. 11

With State Bank of Travancore having already announced a hike in deposit interest rates and Punjab National Bank following suit on Saturday, a fresh spell of hike in such rates seems to be on the cards.

Many banks have used this tool at least twice a few months ago. For instance, Andhra Bank raised its deposit rates in May and September, while Oriental Bank of Commerce hiked its rates in July and August.

According to Mr Prakash Mallya, Chairman and Managing Director, Vijaya Bank: "Most banks have revised their deposit interest rates with a hike of 0.50-0.75 per cent during the last six months, which has certainly helped the flow of deposits to the banking sector."

A recourse seems unavoidable as banks grapple with the issue of how to raise enough resources for lending. The demand for loans is high (growing at 30 per cent), while deposit growth (at 20 per cent), although robust, is not enough. With a reasonable spread between the lending and deposit rates, a hike in deposit rates is an option — and banks may not be averse to using it.

According to Mr Mallya, "Though it may not be necessary to tinker with the spread levels, it is a fact that most banks are still enjoying an interest spread of over 3 per cent and can comfortably hike the deposit interest rates if it is required to do that."

Not everyone agrees with that view. Some express apprehensions about sacrificing their margins unless lending rates are also increased. That's not something the Government is too keen about.

Will the hike in deposit rates work? What if everyone does it? "We'll be back to square one," concedes Mr R.G. Gadkari, General Manager, SBT, while also pointing out that deposits can be inelastic beyond a point when it comes to hiking rates.

Banks are looking at the option of repackaging the existing deposit products and increasing the proportion of low cost current and savings accounts (CASA). These accounts constitute about 40 per cent of the deposit base of public sector banks.

CASA campaigns now include throwing in some incentives and value-added services such as free personal accident cover or allowing free encashment of cheques across various branches, apart from a 0.5 per cent higher rate, as for instance, SBT has done. SBT hopes to raise about Rs 1,000 crore through its latest campaign within the next 20 days.

PNB hikes rates

Our New Delhi Bureau reports: Punjab National Bank has hiked interest rate on domestic term deposits for 180 days to less than two years by 25-50 basis points. The bank had last hiked the interest rate on domestic term deposits on August 7. The Chairman and Managing Director, Mr S.C. Gupta, said the latest hike on certain domestic term deposits would give a fillip to economic development.

He also expressed hope that the aspect of reduction in margins on this count would be taken care of through better management of recovery in the asset portfolio.

PNB has announced this hike after factoring the hardening interest rates in the Government securities market and the credit pick up in the economy.

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