Banks told not to bid for bulk deposits

The finance ministry and the Reserve Bank of India (RBI) have asked public sector banks not to bid for bulk deposits– a practice that becomes rampant during quarter ends when banks rush for funds to meet targets, leading to a spike in short-term rates.

Last week, public sector bank chiefs met Finance Minister P Chidambaram for the quarterly performance review. Bankers who were present in the meeting said both finance ministry and RBI officials raised concern over the spike in short-term rates during quarter ends.

Bankers said RBI Deputy Governor K C Chakrabarty told them nowhere in the world such bidding for bulk deposits happened and Indian banks should also refrain from doing so. Bulk deposits are of 30 days to one-year maturity and of amounts varying from Rs 1 crore to Rs 1,000 crore or even more.

The move comes after the finance ministry issued norms that required banks to reduce the proportion of bulk and certificate of deposits to 15 per cent of the total deposits by March 31, 2013.

Since some of the banks have a very high share of bulk deposits, like 40 per cent or above, those banks have requested the ministry for more time to comply with the norms. Now, the ministry is of the view that since bulk deposits are costly deposits, it adds to the cost of funds. “If the bulk deposits could be reduced, then the cost will come down and banks can pass the benefit on to customers by reducing lending rates,” said the chairman and managing director of a public sector bank, explaining the rationale of the finance ministry’s appeal.

On the back of sluggish deposit growth for the last two years, in March this year, rates for three-month bulk deposits went above 12 per cent — an increase of more than 250 basis points in one month — as banks scrambled for funds to shore up their top line. As a result, in March deposit growth swelled by Rs 3 lakh crore – one third of the deposits garnered in the entire financial year 2011-12.