ANALYSIS. Why ‘non-callable deposits’ could prove to be a non-starter

Banks may face a tough call when it comes to launching deposits ‘without premature withdrawal’ facility as costs may outweigh benefits.

There are three possible reasons why the so-called “non-callable deposits” (deposits which cannot be redeemed by depositors before the maturity date) facility could prove a non-starter.

First, while the non-callable deposits will be a stable source of funding, they will not come cheap. Second, there are alternative resource mobilisation avenues in the form of certificates of deposit (CDs), which are cheaper. And, third, bulk depositors may not want to lose the ability to take advantage of interest rate arbitrage by locking into such deposits. On April 16, the Reserve Bank of India allowed banks to give customers placing deposits in excess of ₹15 lakh the option of ‘with and without premature withdrawal’ facility. The aim of this move is to help banks deal with asset-liability management issues — deposits (liabilities) carry fixed interest rate and banks face the risk of these being prematurely withdrawn, assets (loans) carry floating interest rate.

No launches, yet Pointing out that no bank has yet come out with non-callable deposits, Andhra Bank Chairman and Managing Director CVR Rajendran, said: “On callable deposits (which can be withdrawn prematurely by the depositor) itself we are giving about 8.50 per cent.

“Most of the banks are still paying 8.75 per cent interest for one-year deposits. On non-callable deposits, the market is expecting at least about 25 basis points more interest than on callable deposits, which makes it 9 per cent a year. One-year CD is going today at around 8.25 per cent.”

CD has a rear-end yield, which means a bank will pay interest only at the end of maturity, and not quarterly as in the case of deposits.

“So, a CD costs me only 8 per cent. If a CD is available at 8 per cent without any operating costs for me, why should I go and take bulk deposits or non-callable deposits at 9 per cent?” asked Rajendran.

CDs are negotiable money market instruments issued by banks. They have maturity of between seven days and up to one year. The minimum deposit that could be accepted from a single subscriber should not be less than ₹1 lakh, and in multiples of ₹1 lakh thereafter.

While acknowledging that non-callable deposits are in the interest of bankers as they will be able to better predict and estimate their liability side mismatches, Vijayalakshmi Iyer, Chairperson and Managing Director, Bank of India, pointed out that it will be difficult for a customer to switch loyalty to a different bank once he decides to place a deposit at a fixed rate.

“So, this may not be looked upon favourably by customers who go for bulk deposits. They are the ones who keep changing (switching to different banks in search of higher interest rates),” she said.

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