The Hindu Business Line : Focus on raising low-cost funds, Ministry tells PSBs

Rate impact
High rates inconsistent with inflation trend
Will lead to cost push effect on lending rates
Will result in escalation in weighted average cost of working funds

C. Shivkumar

Bangalore, July 17 Concerned over the retail deposit chase at high rates of interest, the Union Finance Ministry has asked public sector banks (PSBs) to focus on raising low-cost funds, particularly current account and savings account (CASA).

Barring a handful of PSBs, most large banks currently have a CASA base of barely 20 per cent.

The Ministry, at a meeting with top bankers, has conveyed that it wanted this ratio to be raised to 35 per cent of their respective demand and time liabilities, said the head of a PSB who attended the meeting.

Among the banks that are close to the Ministry’s prescribed CASA, include Central Bank of India and Vijaya Bank.

Sources said that the Ministry’s concern was largely prompted by PSBs offering high interest rates on short-term deposits at rates close to 10 per cent. Such rates were being offered for tenures of slightly above one year. This was done by structuring their maturities within the one-two-year band. Bankers said that one of the major areas of concern for the Ministry was that the high rates were inconsistent with the current inflation trend. With year-on-year inflation at just 4.3 per cent, the real rates were well over 5 per cent. Historically, one-year real deposit rates have seldom exceeded 2 per cent.

Credit offtake

The Government’s fear was that such high rates would lead to a cost push effect on lending rates. The implication was that the current regime of high rates would lead to an escalation in the weighted average cost of working funds and in turn impact credit offtake, particularly in the productive sectors and adversely impact the GDP growth target of 9 per cent. The weighted average cost of working funds for most banks is already over 6 per cent, partly on account of the high year-end rates offered for bulk deposits and the high rates on retail rates.

High retail rates

But the bankers said that they have pushed for high retail rates this financial year, in view of the anticipated credit demand and the possibility of redemption pressures from bulk deposits that were raised at rates as high as 12 per cent.

The risk of premature redemption of the deposits was particularly high from mutual funds (MF), some of which are now facing high repurchases from investors. Between April and June this year, redemptions/repurchases by MFs were in excess of Rs 6.3 lakh crore.

Besides, the high cost of Government borrowings, despite the liquidity overhang, was also one of the major factors triggering the concern. So far, the market borrowings of Rs 58,000 crore have been made at rates of 8 per cent. Besides, the State Governments are also beginning to exert pressure in view of disintermediation of small savings to bank deposits, leading to an escalation in their respective revenue expenditures.

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Focus on raising low-cost funds, Ministry tells PSBs