HDFC Bank sees no need to offer premium on bulk deposit rates

HDFC Bank, the second-largest private sector lender in the country, will not offer a higher rate on bulk deposits than it pays for retail deposits of similar maturities.

The lender’s comfortable liquidity position, combined with downward bias in interest rates and slow credit growth expectations in the first three months of this financial year, has allowed it to take this decision.

“The difference between bulk and retail deposit rates has come down sharply. The difference is probably 50 basis points now. Our view is that the bulk deposit rates should actually collapse to the retail rates,” Paresh Sukthankar, executive director, said.

He added despite the decline in bulk deposit rates in recent weeks, these would be lowered further to match the retail deposit rates, as the outlook on credit growth in the current quarter appears muted. “It is logical that bulk deposit rates will decline first before any reduction in retail deposit rates,” Sukthankar said.

Earlier this week, the Reserve Bank of India (RBI) had said banks must aim to reduce the variation in interest rates on bulk and retail deposits of similar maturities. The central bank's view did not find favour with most bankers, who felt offering a premium on bulk deposit rates was necessary to address liquidity mismatch.

"We cannot wish away the market reality. Of course, this will be the ideal way to go. But a high value customer always wants a premium and that has to be respected...The rates are determined by market conditions. Hence, it is difficult to prescribe a stance like this," Pratip Chaudhuri, chairman of State Bank of India, said.

According to banking analysts, while HDFC Bank's strong liquidity position may allow it to remove the premium on bulk deposit rates, the same may not be possible for most others, especially the smaller ones.

Sukthankar also said that the bank was not in a hurry to collect deposits. "Our liquidity is extremely comfortable. It has been mostly in surplus and we have been a lender (in the money market) at times. From the liquidity side, there is no push to get deposits at high rates," he said.

The uncertainty over loan demand in the traditionally "weak" first quarter of the financial year is also a factor why HDFC Bank is likely to cut its wholesale deposit rates.

While credit demand is expected to improve following reduction in lending rates, Sukthankar said deposit costs need to fall for loan rate cuts to happen.

HDFC Bank has so far not announced any revision in its lending and retail deposit rates since RBI reduced its policy rate by 50 basis points on April 17.