Banks focusing on recurring deposits to garner long-term resources

Although top bankers are calling out for the need to increase low cost current and savings account (CASA) deposits, on the other hand they have asked their branches to speed up the process acquire long-term resources under recurring deposit (RD) schemes.

It is not difficult to find out the reason why banks are moving their focus on RDs. Although CASA deposits are low cost, but they are not stable as customers can withdraw funds any time. Whereas in RD scheme customer withdraw amounts ranging from a minimum of Rs 50 to a maximum of Rs 10,000 a month and receive a lump sum on maturity, which provides stability to a bank’s resource base.

Earlier RD scheme went out off the sight of banks because of increasing competition among banks to acquire CASA deposits.

In spite of the fact that term deposit rates apply to RDs and interest is compounded quarterly, bankers claim that long-term resources collected under the RD schemes can somewhat handle asset-liability mismatches and also help in financing infrastructure projects.

Some of the banks such as Corporation Bank, Union Bank of India, Bank of India and Central Bank of India, in the last few months have started refocusing on RDs. At present, the RD portfolios of most of the banks, public, private or foreign, have nothing to write about.

However RDs can be related to systematic investment plans floated by mutual funds, leaving latter’s attendant risks. A salaried depositor can build up savings for child’s education, daughter’s marriage, retirement, etc. by maintaining savings discipline. Some banks even allow inconsistent installments.

For instance, a 60-month RD with a bank at a monthly installment of Rs 1,375 per month will give a depositor Rs 100,890 at maturity (interest rate 7.25 per cent, compounded quarterly). Also, interest earned on the amount is exempted from tax deduction at source.

In April 2009, Corporation bank a Mangalore based lender had launched ‘Lakhpati RD scheme’, it is marketing it in a big way to wipe up long-term resources of 5-10 years duration, informed the Chairman and Managing Director, Mr J.M. Garg.

The bank has been able to manage to collect about Rs 100 crore every month ever since the scheme’s launch. The bank is looking for doubling the monthly collection to Rs 200 crore by signing up two lakh customers for the scheme (as against 90,000 now) by March-end 2010.

On the other hand Bank of India is pushing up its branches to promote the RD scheme. Mr A.A. Badshah, General Manager, pointed out, “We can gauge a customer’s behavior by his savings discipline. If a RD account holder is regular in depositing his/ her installment, say for two-three years, we can then cross-sell our loans. It is unlikely that such a customer will default on loans.”

While Union Bank of India’s Union Monthly Plus RD scheme, which was launched six months back, has been able to collect about Rs 400 crore through 3 lakh accounts. According to Mr S. Govindan, General Manager, “Our RD deposit base at around Rs 500 crore could be termed negligible when compared with our total deposit base of over Rs 1 lakh crore. However, with our new scheme we want to grow our RD base to 10 per cent of the total deposit base over the next few years”.

Central Bank of India is also planning to launch an RD product along with an accident insurance feature later this month.