Tuesday, July 22, 2008

BoR hiked interest rates on FDs from today

On Monday private sector bank, Bank of Rajasthan hiked the interest rates on fixed deposits on certain maturities.

According to Bank of Rajasthan in a press release said a new 500- day deposit scheme has been introduced on which bank is giving 10.25 per cent interest to depositors and is one of the highest profit in the market.

The bank also introduced two new maturities. Deposits having tenure of 12 months to 16 months 13 days, customers would get an interest rate of 9.75 per cent.

FDs having a maturity of 16 months to 15 days to 36 months, there rates have been revised to 9.5 per cent.

In addition to this bank has also increased the rate of interest for deposits having a time slab of three years and above from 8.75 per cent to 9 per cent.

The revised rates will be effective from today.

Monday, July 21, 2008

Rise in fixed deposit rates draws investors

Since the beginning 2008 stock market has seen down fall and inflation rising. With rise in inflation the interest rates on term deposits started showing negative interest. After the Reserve Bank of India move to raise short – term lending rates (repo rates) and mandatory bank deposits with the central bank (CRR) by 50 basis points each to check inflation banks have revised fixed deposit rates because of this the fixed deposits have become flavor of the month. Other wise the stock markets had an edge over fixed deposits, because of the booming stock indices.

Even the government's saving schemes, especially the post office saving schemes, was also having edge over the FDs. The reason behind the limelight of FDs includes the decision to give tax breaks in terms of coverage under Section 80C of the Income Tax Act. Another important factor has been the gradual increase in the interest rates on FDs.

The deposits have been brought on same level with the small savings schemes. Investments in term deposits offering a tax deduction have a lock in period of five years. According to the government notification no term deposit can be encashed before five years from the date of investment. The ceiling on investments is Rs 1 lakh for tax deduction. The interest earned on these deposits will attract tax either on an accrual basis or on receipt basis. If the deposit is made with a joint holder, the tax benefit is given to the first holder.

Under Section 80C the investors have been given the option of fixed deposits to complete their investments. In case of investments in National Savings Certificates (NSC) the return is eight percent and the tenure is six years. However, you can keep the NSCs as security for a loan. The accumulated interest is considered as a further investment and hence, it is also eligible for Section 80C benefits. These investments are totally secured in nature. They constitute a medium term investment opportunity. Although income earned in the form of accrued interest is taxable each year.

Whereas, an investment made in the Public Provident Fund (PPF) is for long-term investors. This investment is also totally secure. The interest earned on this investment is exempted from tax. The deposits are exempt from wealth tax. The rate of interest is not fixed for the entire duration of the investment, but is announced regularly. The interest rate is revised by the government at intervals. The interest rates can be changed in the middle of the investment period. Further, the investment is for a fixed period of 15 years.

The tax aspect needs to be factored in. The interest income from fixed deposits is fully taxable, without the benefit of any deduction in the hands of the receiver, which means that for all those who come under the highest tax bracket, the applicable rate will be 30 percent, plus cess.

Investors prefer fixed deposits only in case the interest rates are high enough. FDs still have a long way to compete with these other investment avenues available to investors. Investors have to take care of certain factors such as interest rates, returns, lock-in periods, liquidity and security, before taking an investment decision.

Banks in metros show good business in deposits and loans segments

As per the records of the Reserve Bank of India (RBI) the country’s top five centers located in Greater Mumbai, Delhi, Bangalore, Kolkata and Chennai have been doing good business when the country’s banking community is making hard efforts for getting business. The top five centers have accounted for 44.5% of bank deposits and 53.6% of bank lending at the end of 2007-08.

The reason behind trapping of a bigger slice of deposits pie in this year as compared to a year ago can be the down fall of equity market since the beginnings of 2008 other than banks’ aggressive marketing strategies in top business centers.

According to an economist with a leading private bank “when equity market investors, especially online traders offloaded their holdings, the money came directly to the bank coffers. So, the top business centers have seen such automatic growth in bank deposits. Investors have also preferred bank deposits to equities or equity-linked products.”

The results of top five cities bank deposits have been quite surprising which have crossed the average annual deposits growth by several levels. Aggregate deposits have grown by 26.4% to Rs 14.36 lakh crore in the five centers collectively over Rs 11.36 lakh crore a year ago. In 2007-08 the average national deposits growth has been 24.2% over the preceding fiscal. If we see the individual reports Greater Mumbai, Delhi and Kolkata have contributed more to the trend, recording higher-than-average growth. “The significant rise in corporate salaries in bigger cities is another reason behind the higher-than-average growth,” an industry analyst pointed out.

If we compare the credit growth, the top five cities accounted for 53.6% (Rs 12.84 lakh crore) of the gross bank credit of Rs 23.95 lakh crore at the end of 2007-08. As on March 31, 2007, the share was 53.8% (Rs 10.5 lakh crore) of the gross bank credit of Rs 19.5 lakh crore. Interestingly, bank lending grew more in Bangalore (26.3%) and Kolkata (23.2%) than national average (22.8%).

At these bigger centers there is large amount of deposits and loans in comparison to the smaller centers.
As per the data of the central bank the top 100 centers in terms of deposits, have gathered 69.7% of the total bank deposits as on March 31, 2008. Similarly the top 100 centers in terms of bank loans have accounted for 77.8% of total bank credit. While in March 2007, the corresponding share of top 100 centers in aggregate deposits and gross bank credit were 68.9% and 77.4% respectively.

While, as on March 31, 2008 the number of banked centers served by scheduled commercial banks, stood at 34,426. Out of these centers, 28,529 were single-office centers and 54 centers had 100 or more bank offices.

Wednesday, July 16, 2008

Bank deposits regain popularity after hike in interest rates

After the increase in inflation the fixed deposit rates have become negative. Fixed deposit was no more an attractive investment option. Recently banks hiked deposit rates after RBI hiked its rates, because of this fixed deposits position has become better.

Banks have increased interest rates on FDs for one year and above. But interest rate on time slab less than three years is now around 9.5–10 per cent which was around seven per cent six months ago. Over the past few months the equity market position has become highly volatile therefore investors are looking for stable options.

Most of the public sector banks are offering 9.5 per cent on one-year deposits. While the new generation bank IndusInd Bank has launched a scheme offering as high as 10 per cent returns for a 400-day deposit.

According to Mr Saumitra Sen, head of branch banking, IndusInd Bank, “Fixed deposits are a much safer asset class for retail investors, for a one year horizon, given that the Sensex is down.” Banker stated some of the existing depositors are opting for ‘premature renewal’ of their existing deposits at higher rates.

Corporation Bank is offering 9.6 per cent on a 400-day deposit from July 8, and this offer is for a limited period. The minimum deposit amount is Rs 25,000 and maximum is Rs 15 lakh. According to a senior bank official on less than 10 days, the bank has earned around Rs 500 crore.

The official informed, “Given the high inflation, the rates may not be very good, but in the current circumstances, they are better than equity or mutual funds. We may extend the time period for the scheme, because I don’t envisage rates to come down in the near future.”

Another PSU bank Union Bank of India has raised Rs 6,000 crore from the 9 per cent 400-day deposit scheme. Bank launched scheme on April 10 till the first week of July, and currently the scheme has been discontinued. As per the revised rates the bank is offering 9.5 per cent for a deposit of over one year.