Date:25/07/2007 URL: http://www.thehindubusinessline.com/2007/07/25/stories/2007072552360100.htm

Back Banks rolling back high deposit rates

C. Shivkumar

Bangalore, July 24 With markets awash with liquidity, banks are poised to roll back high deposit rates being offered for tenures of one year and above.

Currently, almost all the banks are offering interest rates between 9 and 10 per cent for one-year plus deposit accounts. The high rates are, however, not available for maturities above two years.

But the Central Bank of India Executive Director, Mr K. Subburaman, said: “These high rates will not last given the current liquidity situation.”

The liquidity overhang was caused partly by injection of high-powered money through the Reserve Bank of India’s interventions in the foreign exchange markets.

During the last week alone, accretions to the foreign exchange reserves were $4.12 billion to defend the exchange rates at current levels.

During last week, besides the Treasury bill auctions, there were no issues of market stabilisation securities and the reverse repurchase window is currently capped at Rs 3,000 crore for mopping up the liquidity.

During the last few weeks, deposit growth has accelerated to 25 per cent. Time deposits within the banking system alone have grown by 52 per cent on a year-on-year basis. Most of the accretions are within the one-year and 18-months’ maturity band.

Bankers said that this was in view of the high rates on offer. During the same period, however, there was marked slowdown in credit offtake from various sectors.

According to the RBI’s data, the non-food credit growth for the year so far was Rs 3.73 lakh crore, down 1 per cent over the corresponding period of the last financial year.

A banker who preferred anonymity said that the slowdown in offtake started after the RBI whip sent to the banks to contain retail and realty loan exposures, especially the public sector banks (PSBs).

PSBs have, as a result, pared exposures in these two sectors to just 20 per cent of their gross advances though this has resulted in non-food credit slowing down.

Faced with such large deposit accretions and credit slowdown, banks were left with few opportunities other than deploying the resources in the T-bills.

As a result, yields on the 91-day T-bills had crashed last week to a three-year low of 4.5 per cent. With few avenues available to park the funds, banks are prepared to lend in call/or in the collateralised borrowing and lending obligations market at rates as low as 0.5 per cent.

The situation is now beginning to impact their respective net interest margins (NIMs), since the yield on average assets is down and at the same time, the costs of liabilities are high.

The average yield on assets was down to about 8.5 per cent in the first quarter of the current financial year, the bankers said, whereas the average cost of working funds was close to 6.25 per cent.

The option, they said, was, therefore, to cut the cost of deposits to protect the NIMs.