Boi Pens Floating Rate Deposit To Guard Spread

Bank of India (BoI) has come out with a revamped six-year floating rate deposit scheme to overcome asset-liability mismatches and protect its spreads. BoI had introduced the scheme couple of years back but failed to elicit adequate response from customers.

Under the new scheme, interest rate, which is to be initially re-set at annual rests, is a 25 basis points mark-up on the three-year fixed deposit rate of the bank.

Syndicate Bank, State Bank of India, Bank of Baroda, Centurion Bank and ICICI Bank are among the few Indian banks that have already introduced this scheme, while Union Bank of India is toying with the possibility of introducing one.

 

Depending on the customer response received from the 47 zonal offices, BoI at a later date plans to re-set deposit rates at quarterly rests in keeping with the international trends.

BoI officials pointed out that each time there is a bank rate cut, the banks in normal course respond by cutting their prime lending rate (PLR) as well as the deposit rates. However, while the cut in PLR takes immediate effect the cost of deposits does not come down immediately as the new deposit rates are applicable only on fresh deposits. Introduction of the floating rate deposits will not only take care of this lag effect but prevent squeeze on banks spreads.

From the customer point of view, they explained that floating deposit rates will enable the customer to capitalise on the benefits arising out of rising interest rates.

This move by BoI to reinvent its floating rating deposit scheme comes in the wake of the Reserve Bank of India (RBI) indicating in its mid-term review of monetary and credit policy for 2001-02 that it would be highly desirable for banks to move over to a variable interest rate structure as early as possible.

As interest rates could move in both directions, a variable interest rate regime on long-term deposits does not necessarily imply lowering of the average interest rate earned by depositors over a period of time. Floating rate deposits give banks flexibility in lowering their lending rates in the short-run.

Lacklustre response to the earlier scheme has been attributed by BoI officials to its complexity leading to failure in marketing (getting the concept across to the customers by the bank staff).

"In the earlier format interest rate on our floating rate deposit was linked to the yield on the 91-day treasury bill. It was very difficult for bank staff to explain the floating rate deposit concept to customers as majority of them (customers) were unaware of T-bills," senior officials said.

Moreover, the scheme was targeted only at corporates and high net worth individuals at select branches with the minimum deposit amount being Rs 1 crore. Despite the minimum deposit threshold being drastically reduced to Rs 15 lakh, the scheme evoked lukewarm response in a falling interest rate scenario where everybody held a uniform view that the rates would only go southward.

Under the revamped scheme, which is now available at all branches across the country, the minimum deposit amount is Rs 25,000 and interest rate offered on it is a 25 basis points mark-up over the interest rate prevailing either at the beginning or the end of the first quarter on the three-year fixed deposit rate.

Currently, the bank is offering an interest rate of 8.75 per cent per annum on the floating rate deposit as against 8.5 per cent per annum interest offered on the three-year deposit.