The Hindu Business Line : Corporates re-pricing deposits with banks

Bangalore, Dec. 1 With short and medium-term deposit rates remaining high, corporates are beginning to terminate past deposits and reinvesting them at current rates.

Bankers said that many banks are experiencing this situation. Currently, some banks are offering interest rates of anywhere between 10 and 11 per cent for term deposit slabs between one year and 499 days. Besides, corporates, that had burnt their fingers in the mutual funds, are also turning to bank certificates of deposits at rates of about 9 and 10 per cent, the bankers said.

RBI data

The re-pricing is also becoming apparent from the figures released by the Reserve Bank of India. The RBI’s weekly statistical supplement showed gross deposit accretion of Rs 3.2 lakh crore so far this financial year. However, time deposit accretions for the same period were Rs 3.9 lakh crore.

Bankers said that some of retail depositors also resorted to re-pricing their deposits to take advantage of the higher interest rates, implying that at least Rs 70,000 crore was reinvested. Bankers said that this kind of re-pricing pushed up the cost of working funds for the banks.

Cost of working funds for the banks are currently well over 7 per cent. This is also because the component of high cost resources in the banking system is on the increase. At least 30-35 per cent of the banking sector’s deposits are priced upwards of 9 per cent. In addition, some of the CD liabilities of the banks are also taken at very high costs.

Since the beginning of this fortnight, for instance, the 12-month CDs are priced at close to 10.3 per cent. CDs comprise one component of the bulk deposits with the banks. In fact, banks and corporates are getting around the Finance Minister’s fiat against bulk deposits through CD floats. This was because, CD pricing is market- determined. This implied that CDs are placed with the lowest bidders. In the case of bulk deposits, corporates invite the bids and the deposits are placed with the highest bidder.

As a result, more public sector companies are resorting to subscribing to bank CDs to maximise their returns on investments. Consequently, few banks are in a position to bring down their lending rates, below the current level. That lending rates are high was evident from the fact, that “Triple A” rated corporates are raising short-term resources at rates as high as 13.5 per cent or just 25 basis points above the current prime lending rate of 13.25 per cent.

However, bankers added, with more investors returning to bank deposits as a safe haven, rates would come down in the coming months. They said that despite the high CD rates at present, they were at least 200 basis points lower than the rates of August and September last.

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