Slack Credit Outgo Forces Banks To Cut Deposit Rates
Banks have finally seen the writing on the wall. Treading on a wafer thin spread, they have started slashing interest rates on deposits. The average return (pre-tax) on bank deposits has come down from around 9 per cent to 8 per cent over the last fortnight. Banking analysts say the deposit rates are still out of sync with the overall interest rate matrix and must come down further.
State Bank of India (SBI) kicked off the trend which was quickly followed by Bank of India, Bank of Baroda, Punjab National Bank, Union Bank and Jammu & Kashmir Bank. These banks have cut the rates on domestic deposits as well as on FCNR (B) deposits. The objective is to bring down the cost of funds and discourage swelling of deposits since the credit offtake is still tardy. Other banks are ready to follow suit.
With investors shying away from the stock markets, the banking system has seen an accretion of Rs 59,161 crore in 2001-02 so far, as against Rs 42,433 crore in the corresponding period of the previous fiscal.
"We do not even need to solicit deposits or hold deposit mobilisation drives as funds are just flowing in," pointed out a senior banker.
While bankers want to push credit to build assets at sub-prime lending rate, they also want to protect their spreads. The solution, hence, is cutting deposit rates.
The SBI on August 4 announced cuts in its short-term lending rates. It also slashed the interest rate on term deposits in the one year to less than two years maturity slab by 50 basis points to 8 per cent. Similarly, interest rate on the two years to less than three years slab was cut to 8.50 per cent.
Jammu and Kashmir Bank has drastically reduced interest rates on domestic term deposits on all maturity slabs by 50 to 300 basis points with effect from August 16.
Double-digit interest rates are being offered only by private banks and foreign banks in the one year and above segment. In contrast, only a handful of banks are offering double-digit interest rates and that too only in the three to five year maturity slab.