The Hindu Business Line : PSBs begin imposing informal ceiling on bulk deposit rates

Corrective step This move was taken to prevent any large liquidity mismatches `A CEILING on interest rates could come within the purview of the MRTP'

Bangalore May 18 Public sector banks (PSBs) have begun moves to impose a ceiling on bulk deposit interest rates in a bid to contain costs and defend the current net interest margins (NIM).

High-level bankers said that some PSBs have initiated discussions for an informal ceiling, especially after events in March-end when bulk deposit rates topped 12.5 per cent.

Bankers said they were now determined to prevent a repeat performance of an internecine deposit rate war among PSBs. In fact, some of the bankers had sought the intervention of the Indian Banks' Association (IBA). But the IBA Chief Executive, Mr H.N. Sinor, said, "Costs need to be controlled. But a ceiling on interest rates could come within the purview of the MRTP."

The legal risks, notwithstanding, the discussions were triggered on fears that the current NIM of 3.1 per cent (average for entire industry) would come under pressure, on account of high bulk deposit interest rates. Some banks like ICICI Bank have already seen the NIMs (the difference between interest earned and interest expended) dip to about 2.7 per cent.

Other private sector banks like Centurion Bank, which restricted participation in the battle for bulk funds have actually seen their NIMs rise to over 4.5 per cent.

PSBs have already imposed an informal ceiling of 30 per cent of their net demand and time liabilities for bulk deposits as a first corrective step. This was to ensure that the over all weighted average costs of deposits remained near about 5 per cent.

Premature withdrawal

Besides, this move was also taken to prevent any large liquidity mismatches on account of sudden redemptions. Though the deposits were placed for periods of at least 180 days, banks face the risk of premature withdrawal, the bankers said. Among the largest bulk depositors were public sector undertakings (PSUs), insurers, mutual funds, large corporate entities, including infotech, and state governments.

Almost all these entities used the bid route for placing the deposits, resulting in some of the private sector banks participating. The bids were placed usually with the banks quoting the highest interest rates and favourable terms.

Redemptions of bulk deposits have already started, bankers said.

In the first month of the current financial year, redemptions amounted to about Rs 1,500 crore.

Bankers said that this mainly on account of some of the state governments drawing their allocated plan funds from banks, after parking them initially.

Some PSBs have also sought the intervention of the Finance Minister in the form of a directive to PSUs to park cash surpluses or bulk deposits funds only with PSBs.

The demand was made at last month's meeting between the Finance Minister and chief executives of PSBs. PSUs are currently permitted to place deposits/investments only with banks having a minimum credit of "AA."

As a result some of the PSUs had made placements with the `AAA' rated private sector banks.

But sources said that the Ministry of Finance was not in a mood to relent to PSBs, since it would imply interference in corporate decisions.

More Stories on : Fixed Deposits | Public Sector Banks

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page