Cash crunch: Banks start to raise short-term deposit rates

Bankers say liquidity will start easing by mid-July.

The current liquidity crunch is pushing banks to offer higher rates as they seek more short-term deposits. Over the last few days, banks have increased short-term rates — for bulk and retail deposits — by as much as by 125 basis points to tide over the cash outflow caused by 3G auction payments and advance tax payments due next week.

Another Rs 38,300 crore is expected to flow out of the system over the next two weeks as companies pay for broadband wireless access spectrum.

State Bank of India (SBI), the country’s largest lender, has raised bulk deposit rates by 100 basis points to 7 per cent. The bank is likely to seek deposits under this plan till the middle of next week, sending a signal to other banks that deposit rates are edging up.

“We have raised bulk deposit rates to 7 per cent from 6 per cent in the backdrop of the current scenario, reflecting tight liquidity conditions. This is a temporary phase and we expect the pressure on liquidity to reduce after a few weeks,” said a senior SBI executive. Similarly, Kolkata-based Allahabad Bank has raised retail deposit rates by up to 125 basis points for deposits maturing in less than one year.

“Raising deposits has become a challenge. Bulk deposit rates for shorter durations have begun moving up,” said an official with a state-run bank. A large private sector bank was in the market for short-term bulk money at rates above 7 per cent, compared with 6 per cent a month ago.

Deposit growth for the year ended May 28 was 14.9 per cent, according to data released by the Reserve Bank of India (RBI) on Friday, as compared to the central bank’s projection of 18 per cent for 2010-11.

Bankers say liquidity will start easing by mid-July, when they expect some collections by the government to begin flowing back into the system.

Earlier this week, SBI began borrowing from RBI after remaining deposit-surplus for almost 20 months, as it gave loans to telecom companies making 3G licence payments. On Tuesday, SBI Chairman OP Bhatt said liquidity was no longer surplus and added there was an upward bias in interest rates.