The Hindu Business Line : Govt concerned at high-cost bulk deposits raised by PSBs

Bankers said that the Finance Minister favoured increasing the share of CASA deposits as they are seen as a low cost, non-volatile deposit base compared to the volatile image surrounding bulk deposits.

C. Shivkumar

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Bangalore, May 8 Public sector banks’ high-cost bulk deposits raised in March and April this year have come under the scrutiny of the Finance Ministry.

The deposits raised were discussed at a meeting between the Union Finance Minister, Mr P. Chidambaram, and chief executives of the PSBs last week. The Chairman and Managing Director of a public sector bank who declined to be identified said the Finance Minister took up the issue with all the banks.

Between late March and early April several public sector banks, including those in the State Bank group, had raised bulk deposits at rates as high as 10 per cent. Some of these funds were time deposits from public sector entities that had invited bids from the banks. The placement was made with the bank that offered the highest rates. Many banks had used the Certificates of Deposit route for raising the funds from private sector corporates.

Govt’s fears

The bankers said the Finance Minister was upset that banks had made bids for corporate bulk deposits, despite being advised against the practice. The concern was that such high-cost deposits would lead to a regime of high interest rates. In fact, the worry also stemmed from the fear that the Government’s own borrowing costs would mount.

The Government’s borrowing for the current year is estimated at Rs 1.456 lakh crore. In addition, there are also interventions in the financial markets through issue of market stabilisation scheme securities, estimated at Rs 2.7 lakh crore. Further, Government debt also included placement of bonds with Oil, Fertiliser and the Food Corporation, against their subsidy dues.

The concern was that the uptick in interest rates would have a fiscal impact through an increase in interest outflows. The bankers said that such a situation was unacceptable to the Finance Minister. For the current financial year, the fiscal deficit target is 2.5 per cent of the gross domestic product.

CASA share

The bankers said that instead, the Finance Minister favoured banks increasing the share of Current Account and Savings Account (CASA) deposits in the current liability mix to over 35 per cent. The reason for this prescription stemmed from the fact that CASA is seen as a low cost, non-volatile deposit base for banks.

Bulk deposits, on the other hand, are seen as volatile funds that are likely to damage bank balance sheets in the event of sudden redemptions.

CASA for most banks currently comprised only about 25 per cent of the overall deposit mix. The preference switch for CASA was in view of its impact on the weighted average cost of working. Currently, the overall banking sector average cost of workings funds was about 6.5 per cent. Cost of deposits was about 8 per cent. Raising the CASA component implied that the overall cost of working would shrink, allowing sustenance of a regime of interest rate stability in the country.