Reduce variation in retail, bulk deposit rates

The Reserve Bank of India’s (RBI) new directive on reducing the variation in interest rates on bulk and retail deposits of similar maturities has failed to find favour with banks.

“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,” Pratip Chaudhuri, chairman of State Bank of India, told reporters here on Tuesday. Earlier in the day, the regulator said there were wide variations in banks’ retail and bulk deposit rates. This practice was unfair for retail depositors.

According to RBI, the significant disparity in interest rates on deposits with similar maturities indicates banks’ liquidity management system and pricing methodologies are inadequate. “Banks should have a board-approved transparent policy on pricing of liabilities and they should also ensure that variation in interest rates on single-term deposits of Rs 15 lakh and above and other term deposits is minimal,” RBI said in its monetary policy statement.

But bankers said the interest rates offered on bulk and retail deposits depend on the demand-supply situation. During periods of tight liquidity, lenders are left with no option but to offer a premium on wholesale deposit rates to mobilise funds.

Chaudhuri said: “If today my treasury says I need Rs 500 crore urgently, please be flexible on the rates. The alternative to that will be a default in CRR (cash reserve ratio). So, these are determined by market conditions and are a function of demand and supply. Hence, it is difficult to prescribe a stance for all times to come or for the full year. Globally, I don’t think there is a convergence between a $5,000-deposit and $500 million-deposit. Higher the deposit, greater is the premium expectation, and rightly so.”

His views were echoed by M D Mallya, chairman and managing director of Bank of Baroda. “Keeping in mind the profile of maturities on both liability and asset sides, banks will decide their rates. I think what RBI has emphasised is that banks should be transparent with their rates.”

RBI also suggested banks must offer a “basic savings bank deposit account” with certain minimum common facilities and without the requirement of a minimum balance to all customers.

In addition, the central bank plans a unique customer identification code (UCIC) for banks’ customers to track the facilities availed by them, monitor financial transaction in various accounts, improve risk profiling and smoothen operation for the clients.

“While some of the Indian banks have already developed UCIC, there is no unique number to identify a single customer across the organisation in many banks.... As a first step, banks are advised to initiate steps to allot a UCIC number to all their customers while entering into any new relationships. Similarly, individual customers may also be allotted UCIC by end-April, 2013,” RBI said.

To improve customer service, RBI also barred banks from levying pre-payment charges for foreclosing floating rate home loans. Bankers said most lenders currently do not have any pre-payment charges on these loans.

“Across all major banks there is no pre-payment penalty on home loans. It has already been waived by most,” Chanda Kochhar, managing director and chief executive officer of ICICI Bank, said.