Demand for bulk deposits set to decline

The demand for high-cost deposits may reduce going ahead, as the deregulation of interest rate on savings account has opened up another avenue for banks to raise deposits at a lower cost.

Typically, banks with lower current account and savings account ratios end up picking up bulk deposits to meet higher credit disbursements or year-end targets. Hence, going forward, the dependence of such banks on certificates of deposits (CDs) may come down.

“Over a period of time, banks’ dependence on bulk deposits may reduce if they are able to mobilise better deposits by offering competitive rates on savings account,” said a bond dealer with a domestic brokerage.

The Reserve Bank of India (RBI) on Tuesday de-regulated the savings deposit rate with immediate effect. Banks paid four per cent interest on their savings deposit. RBI said while banks were free to determine the savings deposit rate, they would have to offer a uniform rate on savings deposits up to Rs 100,000, irrespective of the amount in the account. Banks, however, can offer differential rates of interest on savings deposits above Rs 100,000.

“Higher-value accounts may start switching to banks offering higher rates, while customers with lower balance would prefer to stay with the same bank,” said the chief financial officer with a public sector bank.

Currently, banks are paying 8.5-9.5 per cent on CDs for three-month and six-month tenures. These rates had shot above 10 per cent in times of tighter liquidity conditions, as banks scrambled to arrange funds. With the deregulation of savings bank account, they would be able to garner stronger deposit base at much lower costs, said the official.

However, this transition would take time. Another official with a public sector bank said, “There is time before banks announce rate rises and there could be certain conditions on the tenure for which banks ask the customer to lock in their funds.”