Banks looking to raise short term deposit rate

Banks are looking to raise one-year deposits at 9.75% to meet MF, pension fund redemptions.

The short-term deposit rates have already gone up sharply with banks bustling for deposits of one-year maturity to repay mutual and pension funds. Banks are planning to raise one-year deposits at 9.70-9.75 per cent as against 8.5-8.75 per cent a month ago.

Banker informed that rates have gone up mostly for bulk deposits and might be extended to the retail segment also.

Most of the banks are facing a tight liquidity situation during this period though last year had raised one-year money from the mutual and pension funds at an average cost of 10-11 per cent. This is coming up for redemption now. The deposits accounted for 7-8 per cent of the total aggregate deposits mobilized last year, a banker said.

There had been an increase on the bulk deposit rates in January and February last year too, but for a different reason. In December 2006, after the Reserve Bank of India hiked the cash reserve ratio (CRR) to leash in credit growth, banks had to raise costly money. Last year credit grew by an average 30-32 per cent which was way above the RBI’s estimate of 20-21 per cent.

Apart, in the corporate bond market, banks can raise one-year funds through certificate of deposit at 9.10-9.15 per cent. But dealer’s explained that money raised through certificate of deposits cannot form part of the deposit base.

Some dealers told that the rate war position will continue till the end of February when all the banks are expected to be through with their liquidity provision. Post-February, the position might change as the rates are expected to get moderate.

The aggregate deposit growth for the financial year 2007-08 so far has been higher by 19.5 per cent compared to a growth of 14.2 per cent in 2006-07.

According to Bankers the increased deposit will also trigger demand for investments in government securities to maintain the statutory liquidity requirement. An SLR bond qualifies for the portfolio maintained by banks to meet the statutory liquidity requirement. SLR is the percentage of total deposits banks have to maintain in the form of cash, gold or approved securities. Currently, the minimum SLR is 25 per cent. Another reason for the banks to rush to raise deposits is to boost the balance sheet as the financial year draws to an end. Moreover, there is uncertainty on the liquidity front. Though the system is flushing with liquidity, it is established only in some specific pockets.

Besides, foreign exchange inflows, which used to be a constant source of liquidity for the market, are down to drip following the correction in the Indian equity market and the dollar crunch in the international market following the sub prime crisis.