RBI asks banks to beef up deposits

Worried over banks’ reluctance to increase deposit rates despite its signal, the Reserve Bank of India (RBI) has prodded banks to beef up efforts to mobilise deposits.

At a recent meeting with the country’s top bankers, RBI officials, led by Deputy Governor Subir Gokarn, expressed concern over the tardy growth of term deposits.

Deposit growth has been just 14.44 per cent for the year to August 27, far below RBI’s projection of 18 per cent. This is mainly due to unattractive rates. With inflation close to double digits, the real returns are negative.

Though RBI raised repo and reverse repo rates by 25 and 50 basis points (bps), respectively, on September 16, most banks are yet to take its cue. A day after, the country’s largest lender, SBI, said it was not likely to raise rates before three-six months. “I am not seeing the possibility of any immediate change in interest rates,” SBI Chairman O P Bhatt had said in Indore.

According to bankers, the regulator wants that availability of money should not be a constraint to corporate India’s growth.

Banks, on the other hand, do not see an immediate need to raise rates as demand for loans has not picked up significantly. Bank credit growth till now has been in line with RBI’s projection of 20 per cent for 2010-11.

Rather than raising retail term deposit rates, which are more stable, banks are rushing to raise short-term funds. Yesterday, State Bank of India and some other banks raised around Rs 9,000 crore via the certificates of deposit (CD) route, of which over Rs 5,000 crore was through three-month CDs. Interest rates for three-month CDs were between 7.04 per cent and 7.19 per cent.

SBI offers 6.75 per cent on deposits with tenures of one-two years, but for 555 days it offers 7.25 per cent. For two-three years, the rate is seven per cent. For a 1,000-day deposit, it is offering 25 bps more.

In order to enhance the effectiveness of monetary policy, RBI forced banks to shift to a new loan pricing regime, known as the base rate, which replaced the erstwhile benchmark prime lending rate mechanism from July 1. According to RBI, though the transmission mechanism has improved, it is not robust.

“The transmission from policy rates to market rates has strengthened, with 40 banks raising deposit rates and 26 raising lending rates. These circumstances are expected to prevail, maintaining the repo rate as the effective policy rate and sustaining the strength of the transmission mechanism,” RBI had said in its mid-quarter review of monetary policy.