Others to follow SBI in raising deposit rates

The country's largest bank, State Bank of India (SBI), which recently launched an aggressive deposit mobilisation scheme that offered 8.5 per cent for tenures of seven days to 180 days, has caught the competition off its guard, and other banks are now considering launching similar products.

The new deposit scheme from SBI, launched earlier this week, would be applicable to deposits of more than Rs 1 crore. SBI has waived the pre-withdrawal penalty after seven days to make the product attractive.

Private sector lender Federal Bank followed suit today, launching a fixed deposit scheme for retail customers that offers 9.50 per cent on a maturity period of 200 days. For one year, the rate offered is 9.75 per cent.

According to a senior SBI official, the bank's new product would enable it to take advantage of the arbitrage opportunity, as rates offered for other short-term instruments, like certificates of deposits, are higher. SBI also expects the product, which has no pre-withdrawal penalty, to compete with resources flowing to liquidity mutual fund schemes which offer 8.5 per cent to 9.25 per cent.

SBI is keen to tap surplus funds of corporate houses, which are now parked in other banks, for a lower rate.

“There is a probability that banks would offer higher rates on deposits, given the current liquidity scenario,” said M Narendra, chairman and managing director, Indian Overseas Bank. The Chennai-based lender is also planning to raise rates for one-year maturity by 25 basis points to 9.5 per cent.

A senior Union Bank of India official said banks may decide on increasing the short-term rate over the next seven-10 days.

Liquidity has become tight over the last few days, with banks borrowing more than at least Rs 1 lakh crore, daily, on average, from RBI's liquidity adjustment facility. On Wednesday, banks borrowed Rs 1.35 lakh crore, compared with Rs 1.31 lakh crore on Tuesday from the RBI window. The liquidity tightness is well above the central bank's comfort zone of Rs 50,000 crore.