Just two days after asking public sector banks (PSBs) to reduce the proportion of bulk deposits and certificates of deposit (CDs) to a combined 15 per cent of deposits, irrespective of the present level, the finance ministry on Wednesday backtracked.
Bulk deposits and CDs, short-term instruments floated to raise money to meet asset-liability mismatches or working capital needs, constitute 30-35 per cent for most PSBs.
The ministry asked banks not to have bulk deposits more than 10 per cent of total deposits, while CDs were capped at five per cent.
Banks immediately voiced concern, as such a move had the potential to distort the market.
|BREATHER FOR BANKS
- The finance ministry had asked banks not to have bulk deposits more than 10 per cent of total deposits; certificates of deposit were capped at five per cent
- Banks immediately voiced concern over the instruction, as such a move had the potential to distort the market
- Bankers also said serious liquidity implications would arise out of such a sharp reduction in bulk deposits
“Such a huge reduction in the deposit base will create asset-liability mismatch for the banks. This will also mean a reduction in the balance sheet size,” said a banker who received both the communications, requesting anonymity.
Following concerns raised by banks, on Wednesday, in another communication, the ministry asked the banks to keep the earlier instruction in abeyance.
Bankers also said serious liquidity implications would arise out of such a sharp reduction in bulk deposits, especially at a time when bond auctions are held regularly to support the government’s huge borrowing programme.
The government plans to borrow Rs 5.7 lakh crore (gross) for the current financial year, compared with Rs 5.1 lakh crore raised last year.
The ministry’s instruction for banks for reducing dependence on bulk deposits was aimed at improving profitability, as such deposits come with a cost.
Banks’ rush for bulk deposit become particularly prominent at the end of a quarter, when they want to shore their balance sheet for meeting targets. In March, due to this rush for these short-term deposits, rates had gone above the roof.
“There is no instruction by (the) Reserve Bank of India on the proportion of bulk deposits to total deposits. Banks have their internal policy on these deposits. These are short-term deposits, primarily meant to bridge the asset liability gap in the short run,” the chairman and managing director of a PSB said, on condition of anonymity.
Of late, the finance ministry has been seen to be involved with the day-to-day affairs of banks. It has also asked them to follow instructions on various issues like loan pricing and consortium lending.
The ministry’s interference has not gone down well with the banking regulator, which has written to the government on the issue.