Deposit rate war enters next round

While the Reserve Bank of India’s high interest rate regime has pushed borrowers to a corner, savers and depositors are not complaining. Deposit rates are rising northwards...

While the Reserve Bank of India’s high interest rate regime has pushed borrowers to a corner, savers and depositors are not complaining. Deposit rates are rising northwards with banks engaged in a virtual war to offer higher rates and attract funds, ignoring the warning of finance minister P Chidambaram against offering high-cost deposits.

Interest rates on one-year deposits have crossed the 10 per cent level, prompting savers to ditch small saving schemes like NSC and PPF and go for bank FDs. This is a rise of nearly 40-45 per cent in interest income as rates were around 5.50-6 per cent a year ago.

In the latest round of rate hikes, Yes Bank has raised its fixed deposit rates to 10.25 per cent per annum for regular customers, while offering senior citizens a higher return of 10.5 per cent per annum on deposits from 366 days to two years.

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Standard Chartered bank has raised the interest rate offered on its 373-day fixed deposit scheme to 10 per cent per annum from 9.5 per annum offered earlier. “This makes it the highest rate offered for a comparable time deposit. The bank also offers competitive rates for fixed deposits exceeding Rs15 lakh,” said a bank official.

IDBI Bank has launched a scheme that offers 9.5 per cent interest for regular deposits and 10 per cent for senior citizens. State Bank of India’s net interest income — interest earned on loans minus interest paid on deposits — rose 22 per cent to Rs 4,320 crore in the fourth quarter, according to SBI chairman O P Bhat.

Many banks have already hiked the rates to 9.50 per cent following the rise in rates across the board. “With private banks offering high rates, PSU banks will have to follow suit to retain their funds. Otherwise there will be a flight of funds to private banks,” said a senior PSU banker.

Banks are offering even higher rates for bulk deposits, fearing a flight of deposits to private banks. At a meeting with bank chiefs in April, Chidambaram had asked banks not to raise high-cost deposits which would unsettle their books later. Banks are keen on getting bulk deposits of PSUs and government departments.

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With 10 per cent returns, banks deposits have now become popular than small saving schemes. PPF which has a 15-year lock-in offers only 8 per cent interest rate. Post office schemes also offer similar rates. Net collections under small savings schemes have dipped by 39 per cent in April-February 2006-07 to Rs 45,191 crore as against Rs 74,002 crore collected in the same period in the previous fiscal.

As part of its war against inflation, the RBI has been trying to tighten the liquidity in the system by various measures like hiking the cash reserve ratio, repo and reverse repo rates.
HOW THEY COMPARE
• Saving schemes like PPF and NSC offer only 8% interest but with tax benefits. Funds locked for 6-15 years.
• One-year bank FDs give 10% returns, but without tax benefits. Offers better liquidity than small saving schemes.