FDs fall out of favour with banks

If you think your money in savings bank account will be automatically converted into fixed deposits (FDs), think again. It may just happen that while you are thinking the idle cash may earn 6-6.5 per cent a year, the prevailing fixed-deposit rate for one-year funds, it may actually continue to fetch only 3.5 per cent.

That is because banks are discouraging auto sweeps, fearing erosion in low-cost deposit base in the wake of rising interest rate expectation. The savings and current account deposits (Casa) or low-cost deposits, help banks keep their cost of funds under check, and, in turn, ensure healthy margins.

Though banks have not withdrawn the product, they are not pushing it aggressively either.

“We still have the product, but we are not aggressively pushing it,” said a senior executive of Axis Bank.

Axis Bank has one of the highest Casa component in total deposits, estimated at 45 per cent at the end of December 2009 as against 39 per cent a year ago. The bank executive said the lender would like to maintain Casa at 40 per cent at all times. In the third quarter, the bank’s Casa growth was 29 per cent on year, while total deposit grew 7 per cent, mainly due to slower growth in term deposits, he added.

Interest on deposits in savings accounts is the only regulated interest rate, fixed at 3.5 per cent, and no interest rate is paid on current account balances. The Reserve Bank of India (RBI), in its annual policy announcement in April, mandated the banks to calculate interest rate on savings accounts on a daily basis. Earlier banks paid interest on savings accounts for the last 10 days of a month.

Some of the public sector banks are also increasingly avoiding transfer of low-cost deposits to fixed deposits.

“Earlier, banks used to switch savings bank deposits into fixed deposits of six-month tenure, as the differential between the rates was a mere 25 basis points, or at best 50 basis points. Now, as the gap has widened, we are not aggressively canvassing the scheme, though we still have the product,” said a senior Indian Overseas Bank executive.

The public sector banks have one more reason not to auto transfer funds to fixed deposits, as the government has given them Casa targets and not the total deposit target for 2009-10. Earlier, banks only had to indicate their growth projects for deposits, along with other parameters in their statement of intent.

As a result, most of the public sector banks have stressed on Casa this year, and most have seen growth in line with their projection, at least till the end of the first half of the financial year. Now, with interest rates expected to harden, such transfer will dent bank’s profitability, which is already under pressure due to lack of credit growth and vanishing treasury income.

Some of the banks also said though the strategy of discouraging auto transfer might be successful in urban centres where customers are aware of various investment avenues, but for smaller centres, the model may not be successful.