Short-term deposit rates to fall

NEW DELHI, Feb 22: Several public sector banks are likely to reduce the short-term deposit rates which were suddenly hiked to as high as 12....

NEW DELHI, Feb 22: Several public sector banks are likely to reduce the short-term deposit rates which were suddenly hiked to as high as 12.5 per cent to mop up additional funds.

A top executive of a Delhi-based public sector bank said that the hike in short term deposit rates to 12.5 per cent for deposits ranging from 30 to 90 days was an aberration and would be rectified soon.

Many public sector banks, especially the smaller ones, have increased the rates to 12.5 per cent recently from 5 to 6 per cent some months ago as a temporary measure.

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Although there has been pick up in credit and general firming up of lending rates, it would not possible for the banks to service these short-term high cost liabilities in a sustained manner. And hence, the banks would have to soon reduce short-term rates which should be lower than the long-term deposit rates, after the purpose for which the rates was increased was achieved, it was explained.

The reason for increasing the rates, he said, was to meet the cashreserve ratio (CRR) requirement, which was hiked by the Reserve Bank of India (RBI) for sucking excess liquidity being used for speculation in the foreign exchange market.

Another Delhi-based banker said that RBI was gradually reducing the CRR as spelled out in the Narasimhamam Committee report on the banking sector. In the background of the promise, the banks build up their assets. However, since Bimal Jalan took over as the governor of the RBI there had been significant shift as far as monetary management was concerned. His decision to increase the CRR for checking the rapid decline in the value of rupee, created asset-liability mismatch problems for the banking sector.

To tide over the problem of asset-liability mismatch, banks had no option but to step up deposit rates to mop up additional funds. The larger ones, with huge deposit base refrained from increasing the rates sharply as it would have significantly added to the interest burden.

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However, the sources explained, the smaller banks increasedtheir short term rates to as high as 12.5 per cent, mainly for term deposits ranging upto 90 days. The aim, it was pointed out was to raise about Rs 40 to 50 crore of additional funds to meet the short term fund requirements.

A Delhi-based banker pointed out that it had been possible for his bank to mop up an additional Rs 40 crore by increasing the rates. Now, having achieved the target, the bank was proposing to reduce the rates by about 200 to 300 basis points. Also, he added, there would not be any major asset-liability mismatch problem if the RBI refrained from announcing any drastic measure in the slack season credit policy which would be announced sometime in April.

As far as the impact of the high rates on the bottomline of the banks were concerned, the top executive of the Delhi-based bank pointed out that the impact would be marginal as the additional outflow would be minimal.