The Hindu Business Line : Banks begin readjusting rates on short and long-term deposits

Mumbai, Nov. 17 Select banks have started readjusting their interest rates on deposits on both the short and long end of the maturity spectrum as considerations of asset-liability mismatch and differing perceptions on liquidity has forced a rethink on these rates.

IDBI has hiked rates on short-term deposits (up to one year) and reduced rates on some deposits of a longer tenor. Bank of Baroda has hiked rates on deposits of a shorter tenor while Union Bank has reduced rates on deposits in the one to five-year tenor. ICICI Bank has also realigned deposit rates at the longer end.

Short-term mark-up

Bankers say that the rationale behind marking up interest rates on short-term deposits is that liquidity remains a concern. They, however, maintain a benign view on interest rates in the long-term.

“Given the current market situation, it makes more sense for us to raise money through short-term deposits,” said a senior official at Bank of Baroda.

Cash has been a constraint for banks in the past two weeks after the Cash Reserve Ratio (CRR) was hiked by 0.5 percentage point (effective November 10), sucking out Rs 16,000 crore from the system. Interbank call rates have inched up higher to 8 per cent this week, from 6 per cent earlier.

“The banks, which were borrowing in the call market, would now prefer raising funds through this route given the high interest rates in the call markets,” said Mr P. Mukherjee, President-Treasury, Axis Bank.

In the past few days, banks have had to borrow as much as Rs 30,000 crore from the RBI to fulfil their cash requirements. “There has been pressure on liquidity because of the CRR hike. The Government is also sitting on a huge pile of cash and it seems to have delayed its plans of spending,” said the treasury head of a public sector bank.

Balancing mismatches

Bankers also say that raising short-term funds has become particularly important to match their assets and liabilities. “By raising interest rates on short-term deposits, the banks can manage their asset-liability mismatches,” said Mr K. Harihar, Executive Vice President, Head-Treasury and Financial Institutions, Development Credit Bank.

Many treasury officials say that rates on the longer-end have been cut, as banks believe that the interest rates will soften in the long-term.

“Inflation seems to be under control and if credit offtake is not robust, there is no need for banks to rush in and raise deposits at higher rates on the longer tenor. Except for the recent tightness, banks have had no difficulty in funding their asset-expansion,” said a senior treasury official at a private bank.

Related Stories:
IDBI revises deposit rates
BoI cuts deposit rates by 50 bps
ICICI Bank cuts rates on special deposits again
Some banks trimming deposit rates

More Stories on : Interest Rates | Fixed Deposits

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