The Hindu Business Line : Medium-term bank deposits still popular despite rate cuts

YOU can call it "stickiness", or depositor inertia. We are talking here about the fact that a bulk of bank deposits is parked in the 1-year to 3-year maturity period.

An examination of the residual maturity of deposits for 18 public sector banks, reveals that about 42 per cent of their deposits are from this category. These 18 banks together accounted for deposits of Rs 7,40,264 crore as of end March 2004. That was about half the deposits in the banking system as on that date.

The depositor preference for a medium term deposit hasn't changed much over the past decade. Notably, the maturity pattern was stable, despite the precipitous drop in interest rates during this period. The average rates paid for 1-3 year deposits was in the range of 9.5-10 per cent in 1999. Five years on, the rates for this category of deposits have dropped to 5 per cent. What is more, the rates have been flat at 5 per cent for deposits of different maturities. Yet, medium term deposits are popular.

A banker says, "The common perception during the past few years has been that interest rates will continue to drop. So, depositors preferred the medium term deposit, hoping to enjoy the benefit of higher rates at least for a while."

Five years ago, bankers had generally feared that depositors would desert them if interest rates dropped as sharply as they actually have. This was of course a worst-case scenario. But even the most optimistic bankers did think that depositors would gravitate towards keeping money in shorter maturities, rather than lock themselves into low rates for a longer term. Things haven't exactly panned out as expected.

Depositors didn't desert banks but continued to flock to them - possibly because of lack of suitable safe alternatives. And as to whether they displayed the much-feared savviness of shifting their money to short-term deposits, the jury is still out on this one - at least until banks can give a disaggregated picture of their retail and corporate deposits.

If one were to look only at the distribution figures, the share of very short-term deposits (up to 90 days) has risen from around 10-12 per cent of total deposits during the most part of the past decade to about 17 per cent currently. This increase is to be seen in tandem with the reduction of deposits in the 3-year to 5-year category from between 19 per cent and 22 per cent of total deposits a few years ago to around 7 per cent currently.

Ask bankers to explain this and they point out that a bulk of the short-term deposits could actually be money parked by companies rather than individuals. Banks themselves actively seek some of this money and sometimes offer a small incentive, to boost their balance sheet size. Besides, public sector undertakings and government departments face the pressure of drawing down their budget before the close of the financial year. This they do and park the amount with banks for a short period. That explains some portion of the increase in the very short-term category.

More Stories on : Public Sector Banks | Fixed Deposits

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