Short-term fixed deposits see a change in fortunes

Higher returns, more liquidity draw individual investors to savings accounts.

Less than a week after the Reserve Bank of India announced the deregulation of the savings rate, the banking industry is seeing rapid changes in strategy.

Smaller banks, which require a higher current account and savings account (Casa) ratio, have aggressively targeted customers by raising interest rates by 150-200 basis points (bps). So much so that they are now paying less to individual fixed deposit (FD) holders, mostly high net worth individuals, for certain tenures in the 15-90 day spectrum.

However, things could change once the big boys join the race. R K Bansal, executive director, IDBI Bank, said, “Though not immediately, in the future, the short-term rates could be benchmarked higher. But it would depend on liquidity conditions and the bank's requirements.”

A DIFFERENT TERRAIN

* Smaller banks have started aggressively targeting customers by raising interest rates by 150-200 bps

* These banks are paying less to individual fixed deposit holders, for certain tenures for 15-90 days

* YES Bank is offering interest rates of 4-5% for deposits less than Rs 15 lakh (for a period of 15-45 days)

* IndusInd Bank offers an interest rate of 5.5% for savings below Rs 1 lakh, and 6% for those above Rs 1 lakh

The difference in rates would not have a significant impact on companies, because they operate through current accounts, which do not pay any interest.

The need of the hour, Casa, is governing many a bank's moves. For instance, YES Bank, which kicked off the savings rate war by increasing its rate by 200 bps to six per cent, is offering four-five per cent for deposits less than Rs 15 lakh, for 15-45 days. Rates for senior citizens are one per cent higher. Rana Kapoor, chairman, YES Bank, said, “We expect there would be a shift of individuals moving from short-term fixed deposits to savings bank accounts, since the rates are better. This is better for banks, in terms of administration, and also for consumers, since a higher rate would be paid on a day-to-day basis.”

Similarly, IndusInd Bank offers 3.5 to six per cent for deposits below Rs 15 lakh. It offers an interest rate of 5.5 per cent for savings below Rs 1 lakh, and six per cent for those above Rs 1 lakh. Kotak Mahindra Bank and Ratnakar Bank have also announced similar increases.

Investors, especially high net worth individuals, use the short-term fixed deposit route to park excess funds. This way, they earn a higher rate of return and it also ensures liquidity when they need the money urgently. Banks traditionally pay 50-100 bps more for these deposits, because of the float that they get for providing short-term loans. Rajeev Ahuja, head (strategy), Ratnakar Bank, said, “Savings bank accounts are also more liquid than FDs and come with a cheque-book facility.

Even big banks, which are yet to raise their rates, pay 50 to 100 bps more than the savings rate (four per cent for them) for FDs up to 45-90 days. Both HDFC Bank and ICICI Bank offer five-seven per cent for 30-90 days. State Bank of India has a single rate of seven per cent (for deposits of less than Rs 1 crore) across the seven-90 day spectrum.

Once these join the race to raise rates, things could change. Since almost 10-15 per cent of the money is accounted for by net worth individuals, the banks may continue to maintain the differential. A senior public sector bank official said, “FD rates for up to 90-day deposits would have to be higher to attract net worth individuals in the future.

Bankers believe though bigger banks are playing a wait-and-watch game because of the high Casa comfort, they would also be forced to raise rates over time. “All of them would have to raise their rates sooner or later,” said a banking official of a large private sector bank.