Banks to feel the pinch as deposit rates move up

Rising interest rates on deposits are expected to hit the profitability of banks. Major banks like Punjab National Bank, Bank of Baroda and Oriental Bank of Commerce have raised domestic deposit rates recently but has ruled out hike in lending rate across the board.

Banks had to raise deposit rates as Reverse Repo Rate hike by RBI and tight liquidity situation has put an upward pressure on rates.

"There will be pressure on profit as interest rate in deposits have gone up. For example, interest rate on deposits for one year is more than 7 per cent," S C Gupta, chairman, Punjab National Bank, said, inaugurating its north Delhi zonal office here.

"Soft interest rate regime will continue, whether inflation is below five per cent or above," he said, adding PNB would keep the lending rates stable till march 2006.

K N Prithviraj, chairman, OBC, said the bank has raised deposit rates, but would not hike lending rates. IDBI and BoB has already ruled out hike in lending rates.

To tackle pressure on profitability, bankers say banks have to efficiently manage asset-liability, reduce transaction costs and mobilise deposits. "With credit demand picking up, we need resources. Thanks to better recovery, we had better manoeuvrability," Gupta said,