This refers to “Prospects of floating lending rate, fixed deposits spook bankers” (August 21). All commercial financial institutions including banks are backed by five parameters, namely, capital adequacy, functional stability, market competition, costs and profits. Banks, in particular, have to function with adequate caution to prevent capital erosion, protect market image and retain customer confidence. In this context, a large portion of bank custom traditionally comprises retail depositors who invest for daily operational savings bank accounts or time deposits. Corporate deposits show only an artificial growth with higher cost of deposit. They have less time frame as they adopt a profit-oriented approach with temporary parking of idle funds for short-term returns. They are opened with special rates of interest governed by time and amount that determines the cost. However, interest rates in both the cases have to be linked to liquidity, the quantum of deposits, time span, costs and projected returns from such funds when lent in the market. Conversely, higher interest rates on advances will delay or lead to default in repayment by retail borrowers or stagnate corporate accounts where repayment of instalments is not forthcoming.
Unlike public sector banks, private banks adopt a less flexible approach for market survival, as there is no infusion of capital by the government. Banks have to link their deposit rates to the repo rate. It deters the customer who prefers fixed returns against uncertain floating rate returns. A banking scenario with erosion in deposits, non-recovery of advance instalments and restrictions on the imposition of service charges would lead to pressure on the capital base, impacting liquidity.
C Gopinath Nair, Kochi
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