Banks take fancy to short-term deposits

Banks' dependence on short-term deposits is rising as banks prefer to mobilise resources at lower cost and while investors await investment opportunities with higher returns.

The share of short-term deposits in the total time deposits increased sharply from 43.8 per cent at March-end 2000 to 48.2 per cent at the end of March 2006.

The increased preference for short-term deposits could be attributed to low returns on long-term deposits. This is evident from the spread between short-term and long-term deposits, which narrowed down to 75 basis points at end-March 2006 from 100 basis points at end-March 2005, according to the Reserve Bank of India.

In view of low spread, investors prefer short-term deposits, despite low returns, while waiting for investment opportunities with higher returns. Banks on the other hand, prefer short-term deposits.

With low short-term interest rates, banks are able to mobilise resources at lower cost. This enables banks in a competitive environment to lend at lower cost to well-rated business firms to contain defaults on their loans, RBI said.

Foreign and private sector banks have relatively high share of low-cost deposits. Incidentally, these banks also have high profit margins and low levels of non-performing assets (NPAs).

The share of short-term deposits in time deposits at the end of June 2006 was highest for foreign banks (83.3 per cent), followed by new private sector banks (80.6 per cent), public sector banks (54.3 per cent) and old private sector banks (51.6 per cent).

The growth rate of time deposits, which had moved up somewhat during 2004-05, slipped slightly during 2005-06, reflecting mainly the impact of growing competition from other savings instruments, especially life insurance policies and units of mutual funds.

The efforts made by commercial banks to raise deposits to fund the increased credit demand have led to a significant shortening of the maturity profile of deposits in the banking system.

The issuance of certificates of deposits (CDs) during 2005-06 increased sharply as banks endeavoured to raise funds to meet the increased credit demand.

The amount of CDs outstanding increased from Rs 12,078 crore at end-March 2005 to Rs 43,568 crore by end-March 2006 and further to Rs 63,864 crore by September 15, 2006.