Falling Rates To Restrict Fi Entry Into Short-End Market
The falling interest regime is likely to restrict the financial institutions' (FIs) entry in the short end resource mobilisation market and will not be able to lure away fixed deposits from the public sector banks, according to senior bankers.
Private and foreign banks and non-banking finance companies will feel the heat of competition from the FIs as they make their presence in the short-term resource mobilisation with a thrust following relaxation of norms by the Reserve Bank. Financial insitutions do not have the reach like commercial banks and hence they will tap the areas of NBFCs and private and foreign banks.
The Reserve Bank has permitted the FIs to borrow for one year to five year period. However, they will not be able to offer rates higher than the ones offered by banks ( currently banks offer 12 to 13 per cent for three period) as they will have difficulty in deploying it. That apart they have a cap of 14 per cent on ther deposit rate.
This is because the institutions will have to lend with a minimum spread of 3.5 to 4 per cent. If they offer high interest rates on deposits their effective lending rates also shoots up. Hence, in a falling interest rate scenario the Fis cannot offer high rates on their deposits.
Bank treasury heads refer to the classic case of ICICI which borrowed recently in the bond market at rates above 16 per cent and deployed at around 13.5 per cent and minimised the losses.
Further, the nationalised banks have an edge over FIs and other players in the banking industry as they have a vast retail network of branches.
Nationalised banks to take on FIs
Nationalised banks plan to take financial institutions head on in the term lending markets and are not worried about an asset-liability mismatch. This is so as around 25 per cent of their core depsoits are consistently and continously in the bank's coffers.
Though savings and current deposits are defined as demand deposits, it is our experience that a major chunk of it is always kept with the bank by the depositors. Hence, there will not be a mismatch of assets and liabilities as the banks venture into project finance, said a senior official with a Mumbai-based nationalised bank.
The Financial instituitions announcemnt of allocating nearly 15 per cent of their lendings to working capital requirements, the nationalsied banks have drawn plans to deploy nearly 20 per cent of advances to long-term project finance.