Union Bank signals rise in deposit rates

First increase in over a year

In a move that could signal hardening of interest rates, state-owned Union Bank of India has introduced a new scheme that offers higher rates on deposits with a specified maturity. This is for the first time in over a year that a large bank has raised rates on retail deposits.

The bank, which was earlier offering 6 per cent a year on one to two year deposits, is now offering 6.75 per cent on deposits with a maturity of 555 days. The scheme, which is open for deposits less than Rs 1 crore, came into effect from January 1.

For similar maturity, State Bank of India (SBI), the country’s largest lender, is offering 6 per cent interest, while ICICI Bank is offering 6.25 per cent.

“Looking at the outflows and our asset-liability position, we have decided to price this particular band attractively,” Union Bank of India Chairman MV Nair told Business Standard.

With the bank offering higher return than its peers, other banks could also resort to increasing deposit rates. When contacted, a senior SBI executive said that the bank was also looking to hike deposit rates. “We are looking at our asset-liability position. But we have not yet taken a decision,” he said.

An increase in deposit rates would also put pressure on the lending rates as banks would see a decline in their net interest margins. This could raise the cost of borrowing for corporations as well as individuals.

With rates dropping to 6 per cent and below, deposit mobilisation was mainly taking place in the one-year maturity basket. On the other hand, infrastructure and housing finance, with tenure of 15 to 20 years, accounted for a bulk of the loan sanctions. This had raisied concerns about the widening gap between the maturity of assets (loans) and liabilities (deposits).

Besides, with the improvement in the global economic environment and rise in gold prices, there were other asset classes which were competing for funds from the retail sector. As a result, fresh deposit mobilisation of banks had slowed down. Deposit growth, which was estimated at 22.10 per cent for the one-year period ended April 10, had dropped to 17.84 per cent for the year to December 18. According to the latest data available, the deposit base of banks had shrunk by Rs 21,873 crore in the last one year.