The government has asked state-run banks to reduce their reliance on high-cost bulk deposits and certificates of deposits (CDs), forcing lenders to find alternate sources of funding and drawing complaints from some.
A letter sent to state banks and obtained by Reuters asks them to reduce bulk deposits to 10% of the total and CDs to 5 percent by September. Many state banks source roughly 20 to 30 percent of their deposits through bulk deposits and CDs, according to data included in the letter.
The initiative is intended to improve asset-liability management and reduce reliance on high-cost funds, but some bank executives said it was unnecessary meddling that could crimp lending.
"This is total interference in the working of banks," said one senior executive at a state bank who had received the letter dated July 2, but declined to be identified because the matter is not public.
The government defines bulk deposits as those with short terms and rates that are higher than retail deposit rates.
State lenders, led by State Bank of India (SBI), account for roughly 70 percent of banking business in India.
Banks in India hold a combined 4 trillion rupees of CDs, which make up about 6.5 percent of deposits.
At one small state lender, Punjab and Sind Bank
, bulk deposits and CDs account for 60 percent of total deposits, the letter to state bank CEOs said.
At SBI and its associate banks the total is just 13 percent, while at Andhra Bank the total is 25 percent.
"Banks do not need these deposits but raise them to artificially shore up (their) balance sheets," said a treasury executive at a private sector lender.
He expects CD rates to decline as a result of the measure.
One banker complained that the directive would force his bank to cut down on short-term lending funded by such deposits.
"This means that we have to relook at those short-term loans ... that we gave from the bulk deposits," said the banker, who also declined to be identified.
Banks offer rates on bulk deposits and CDs around 100 to 200 bps higher than on retail deposits.
"It was felt that mobilisation of such deposits at unsustainably high rates not only adversely affects the profitability of public sector banks but also their ALM (asset liability management)," the government said in the letter.
Saday Sinha, banking analyst at Kotak Securities, said banks had already reduced bulk deposits because of sluggish credit demand. "When credit offtake improves then this will have an impact," he said.
In March, three-month CD rates touched a high of 12 percent, well above the best lending rate of 10 percent, as banks rushed to attract higher deposits to reach quarterly targets for deposit growth.
Deposits in India grew by 14.3 percent in the year to June 15, below the central bank's target of 16 percent, with retail customers seeking higher returns in gold, provident funds and post office savings schemes. Loans were up 17.8 percent over the same period.
The one-year CD rate in India is 9.50 percent and the three-month is at 9.15 percent.