• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

N.S. Vageesh

Chennai , Sept. 4

OVER the past two years, interest rates on term deposits in banks have dropped four percentage points from levels of around 10 per cent (for a three-year deposit) to around 6 per cent currently for a similar term.

You might have thought that bank depositors would be disenchanted. You would have expected to see a shrinking deposit base. Yet deposit growth in banks continues unabated and keeps pace with money supply growth at around 12 per cent.

For investors, strapped for choice (other debt market instruments - bonds, debentures, and the like do not offer the attractive returns they once did) bank deposits are the preferred option for traditional reasons - safety and liquidity.

Is deposit growth in banks inelastic when seen in relation to the rates offered on them? One would think so. "Disintermediation does not determine the level of deposits. If deposit rates turn unfavourable, only the composition of deposits in the banking system will be affected, not the level. Deposits are not likely to go out of the system," says economist and former Deputy Governor, Reserve Bank of India, Dr. S.S. Tarapore. He does caution that volatility level in deposits for individual banks may increase and there could be asset liability mismatches for some of them.

Bank depositors will now have to brace themselves for a further chipping away of the returns that they are currently getting. A wave of deposit rate cuts is now underway. A couple of banks have already announced a cut of between 0.25 and 0.50 percentage point in their deposit rates, citing easy liquidity conditions.

Corporation Bank, for instance, has cut its deposit rates by 0.5 percentage point across different tenors with effect from September 1, 2003. The maximum interest paid by the bank is now 5.5 per cent for a term of three years and above. The latest cut brought into effect comes barely two months after its last rate reduction in early July. Mr Cherian Varghese, Chairman and Managing Director, Corporation Bank, said that rates would continue to be soft for the immediate future.

ICICI Bank has cut its deposit rates by 0.25-percentage point across different tenors. The maximum rate that it now pays for depositors is 5.75 per cent for a tenor of between three to 10 years.

Dr Tarapore sees the rate reductions as a logical impact of the recent repo rate cut of 0.5-percentage point effected by the RBI. He says that banks have to defend their margins, drawing attention to the large daily volumes that they have parked in repos during the past few weeks.

A couple of Asset Liability Management Committees (ALCOs) of different banks are scheduled to meet during the course of the week and take a decision on rate cuts. Some are reluctant to bite the bullet just yet. The CMD of Indian Overseas Bank, Mr S.C. Gupta, said that his bank's ALCO met recently and had formed the opinion that the deposit rates were already low and they couldn't hurt depositors further. He ruled out any further cuts for the time being.

Has the bottom for interest rates been reached? Most bankers seem to think so. Improved credit off-take on the back of an economic recovery, as well as a slight stoking of inflation could keep rates stable or move them slightly upward, bankers say. But no one is saying, when?

Article E-Mail :: Comment :: Syndication

Stories in this Section
STCI plans to enter funds management biz

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line