Banks Brave Falling Rates, Jack Up Deposit Interests

At a time when yields on government securities are dropping by the hour and various interest rates shifting southwards, some local banks are preferring to swim against the tide.

Bank of India (BoI) is increasing interest rates on short-term deposits by 75 basis points with effect from Monday.

This is the second time in less than a month that the bank has increased its deposit rates. On January 22 it announced a hike in short-term rates.

Another public sector bank, Bank of Baroda (BoB), too, has recently increased its short-term rates.

Analysts feel that these banks are on a deposit mop-up drive taking advantage of the low interest regime.

BoI is raising the rates on 46 to 90-day as well as 91 to 179-day retail term deposits by 75 basis points to 6.75 per cent on its domestic term deposits. The revised interest rates are effective from February 18.

In the case of corporate deposits -- from Rs 15 lakh to Rs 1 crore -- the hike is 25 basis points for the two slabs, from 6.5 per cent to 6.75 per cent.

"We have come across good corporate demand for working capital funds for 90 to 180 days. And the hike in deposit rates is basically to attract more depositors into these maturity buckets. This strategy will match short-term assets and short liabilities and even out asset liability mismatches," said a BoI official.

He pointed out that there was genuine demand for short term funds from corporates.

"It does not make sense now to raise deposits and park the funds in the government securities market as the yields have come down drastically," he added.

BoI had earlier -- on January 22 -- increased the interest rates on term deposits (in the two maturity buckets of 46 to 90 days and 91 to 179 days) of Rs 15 lakh and upto Rs 1 crore by 50 basis points to six per cent.

Early this month, BoB, raised the rates on domestic term deposits of up to Rs 15 lakh to 6.25 per cent for the 46-90 days maturity bucket and 6.50 per cent for the 91 to 180 days bracket.

In the case of term deposits of Rs 15 lakhs but below Rs 1 crore, BoB is offering an interest rate of 6.50 per cent on deposit in the 46-90 days bracket and 6.75 per cent on deposits in the 91-179 days bracket.

The State Bank of India is offering 6.25 per cent on 46-179 day retail deposits. For corporate deposits above Rs 1 crore, it is offering 6.75 per cent for this slab. In case of 180 to less than one year maturity slab, SBI offers 6.5 per cent on retail deposits and 6.75 per cent on corporate deposits.