The Hindu Business Line : Retail deposits continue to pour into banks

Bankers said that public sector banks are seeing accretions of close to Rs 4,000 crore per day by way of deposits. The flood of the deposits is likely to push up banks’ current and savings deposits accounts (CASA) component in the overall working fund mix to any where between 35 and 40 per cent, bankers said. Last year, CASA ranged between 25 and 30 per cent.

Falling CD rates

This is prompting some to cut back on bulk deposits intake. The declining interest in bulk deposits is evident from the falling certificates of deposits (CD) rates. CD rates for the first time this year dropped below the one year retail deposit rates. The rates on one year retail deposits currently range between 10 and 10.5 per cent. One year CDs are about 100-125 basis points lower than deposit rates.

Last week, there were at least 10 CD issuers for a total of about Rs 2,000 crore. The average rate on the CDs was about 9.10 per cent. Public sector Andhra Bank managed an even better bargain raising the funds at rates as low as 8.32 per cent, though for three month funds.

Till September, banks, including some SBI associates, were offering rates as high as 11.65 per cent. Among the banks that had raised such high-cost funds at that time included banks such as State Bank of Mysore and Canara Bank at rates as high as 11.68 per cent.

Besides, the deposit inflows and bulk fund flows were largely from investors exiting from the equity markets and mutual funds to safe havens such as public sector bank deposits. The exit from the equity markets was evident from the thin trade volumes. Last week, for instance, the average trade per day was about Rs 8,700 crore. During the same period, average trade volume in the debt markets, particularly government securities, was a record Rs 17,000 crore.

But bankers said, despite the deposit increase many banks were not in a position to absorb risk weighted assets in view of capital constraints. Some had already reached the threshold capital limit of 12 per cent. Consequently, the bankers said, additional expansion of risk weighted assets was possible only after Tier-I capital was increased. Under current guidelines, banks are expected to maintain a minimum of 6 per cent Tier-I capital (paid up equity plus reserves).

Banks are also permitted to raise a further Tier-I capital through perpetual bonds or preference shares up to 15 per cent of total Tier-I capital. However, the costs of such hybrid instruments tend to be high, upwards of 10 per cent. This was evident from the high pricing of Corporation Bank’s Tier-II bond issue, priced at 10.10 per cent. Bankers said that perpetual bonds would cost at least 25-50 basis points more in view of the higher risks attached to the instruments.

Wait and watch

Bankers, therefore said, they would prefer to wait for some more before tapping this alternative. Some public sector banks had expected the Government and Reserve Bank of India to address the undercapitalisation issue in the fiscal stimulus package announced, though their hopes were belied.