PSBs reminded of curbs on bulk-deposit auctions

The finance ministry has reminded public sector banks (PSBs) of restrictions on quotes (indicating interest rates) in auctions for bulk deposits from state-owned enterprises. This follows the ministry communicating curbs on short-term loans to PSBs.

A senior executive with a South-based public sector bank said earlier this week, the government had, through a communiqué, stated the instructions issued in 2008-09 on bidding for deposits were still valid.

In 2008-09, the government had asked public sector enterprises not to invite competitive bids for bulk deposits to avoid competition among banks. Such competition, it had said, led to arbitrary rises in deposit rates, which adversely affected the economy.

The government is concerned about the exposure of banks to high-cost funds. Since these are essentially short-term funds, these increase risks of volatility in rates and make asset liability management difficult.

Earlier, the ministry had curbed short-term, unsecured loans of public sector banks, saying such loans to the corporate sector could be sanctioned only after the board’s approval. It had added such loans also had to be backed by securities within six months of sanctioning, failing which the loan would have to be phased out.

A senior executive with a Mumbai-based PSB said for now, liquidity was adequate. However, banks that face asset liability mismatches are in the market to raise deposits. They prefer big-ticket deposits, as these are easier to manage. Currently, rates for one-year bulk deposits stand at about nine per cent.

During the first quarter, a few public sector companies had sought bids from banks to park surplus funds. This practice slowed in July, said the treasury head of a medium-sized PSB.

To broad-base the availability of surplus funds, central public sector enterprises were advised to park extra funds with more than one public sector bank. They could park these deposits at card rates.

In 2008, the government had advised banks to publish card rates for deposits of Rs 1 crore or more. Banks could consider uniform card rates for different maturities of up to one year.