FM wants banks to up deposits

Bankers, however, do not foresee a rate war.

Finance minister P Chidambaram today warned chairmen of public sector banks (PSBs) that the current pace of increase in credit was not sustainable in the face of lagging growth in deposits.

The finance minister, at a meeting in New Delhi, told chairmen of over 15 PSBs to moderate credit growth to the "overheated" sectors (like housing and personal) and instead focus on lending to small and medium enterprises (SMEs) and agricultural sector.

At the meeting, it was decided that the Indian Banks' Association (IBA) would study the issues involved in resources mobilisation by banks and also suggest ways for making bank deposits more attractive.

Chidambaram told bankers that deposit growth should be in the range of 25-30 per cent to sustain a credit growth of around 30 per cent. Deposits are currently growing at around 20 per cent.

M D Mallya, chairman of Bank of Maharashtra, said " I do not see any realignment (any change) in interest rates, both lending and deposits, in the near term. Neither, there would be any war breaking out for bulk deposits as banks have to be worried about their net interest margins."

The incremental credit deposit ratio in the first half of 2006-07 has been about 95 per cent against over 100 per cent in 2005-06.

Chairman of another PSB said banks also have to be alert at what kind of resources are being raised, referring to some banks actively soliciting bulk deposits. Mutual fund debt scheme have been making the most of banks' hunger for resources and investing in higher-yielding certificates of deposits of banks.

The total outstanding CDs amount to Rs 63,864 crore as on September 15, 2006, up from Rs 27,626 crore crore a year earlier. The range of interest rates offered on the CDs has moved up to 7.13-8.50 per cent from 4.66-7.75 per cent.