The Hindu Business Line : Banks turn back to recurring deposits

Mumbai, Nov. 7 Even as top bankers are making noises about the need for increasing low-cost current and savings account (CASA) deposits, they are quietly getting their branches to step on the gas to garner long-term resources under recurring deposit (RD) schemes.

The reasons for banks turning the spotlight on RDs are not far to seek. While CASA deposits are no doubt low cost, they are not stable as customers can withdraw funds any time. In sharp contrast, an RD scheme, whereby a customer squirrels away amounts ranging from a minimum of Rs 50 to a maximum of Rs 10,000 a month and gets a lumpsum on maturity, lends stability to a bank’s resource base.

The RD scheme went off banks’ radar due to competition among banks to garner CASA deposits.

Notwithstanding the fact that term deposit rates apply to RDs and interest is compounded quarterly, bankers aver that long-term resources collected under the RD schemes could, to an extent, take care of asset-liability mismatches and help finance infrastructure projects.

In the last few months, Corporation Bank, Union Bank of India, Bank of India and Central Bank of India, have renewed their focus on RDs. Currently, the RD portfolios of most banks, public, private or foreign, offer nothing to write home about.

RDs can be likened to systematic investment plans floated by mutual funds, but without the latter’s attendant risks. A salaried depositor can build a nest-egg for child’s education, daughter’s marriage, retirement, etc. by keeping up the savings discipline. Some banks even allow variable instalments.

For example: A 60-month RD with a bank at a monthly instalment of Rs 1,375 per month will fetch a depositor Rs 100,890 at maturity (interest rate 7.25 per cent, compounded quarterly). Moreover, interest earned is exempt from tax deducted at source.

Corporation Bank is marketing in a big its ‘Lakhpati RD scheme’, launched in April 2009, to mop up long-term resources of 5-10 years duration, said the Chairman and Managing Director, Mr J.M. Garg.

The Mangalore-headquartered bank has managed to mobilise about Rs 100 crore every month ever since the scheme’s launch. The bank is seeking to double the monthly mobilisation to Rs 200 crore by signing up two lakh customers for the scheme (as against 90,000 now) by March-end 2010.

Bank of India too is encouraging its branches to promote the RD scheme. Mr A.A. Badshah, General Manager, said “We can gauge a customer’s behaviour by his savings discipline. If a RD account holder is regular in depositing his/ her instalment, say for two-three years, we can then cross-sell our loans. It is unlikely that such a customer will default on loans.”

Union Bank of India’s Union Monthly Plus RD scheme, launched six months back, has mopped up about Rs 400 crore through 3 lakh accounts. “Our RD deposit base at around Rs 500 crore could be termed negligible when compared with our total deposit base of over Rs 1 lakh crore. However, with our new scheme we want to grow our RD base to 10 per cent of the total deposit base over the next few years,” said Mr S. Govindan, General Manager.

Central Bank of India plans to launch an RD product with an accident insurance feature later this month.

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