Bankers, however, said the move is unlikely to materially affect deposit mobilisation.
Last week, the RBI proposed allowing banks to offer differential interest rates on bulk deposits based on their liquidity characteristics under the LCR framework. The central bank also proposed that banks disclose deposit interest rate schedules on their websites before the start of each business day, and adhere strictly to those rates. The changes are aimed at improving deposit pricing, liquidity risk management, and asset-liability management practices.
"The proposal will allow banks to align deposit pricing more closely with the liquidity characteristics of different depositor categories. Today, for the same tenor and amount bucket, banks are required to offer the same rate irrespective of whether the depositor is a financial entity or a category with a lower run-off factor under the LCR framework. As a result, banks often have to create separate maturity buckets to differentiate pricing. The proposed framework removes that constraint and allows banks to directly price deposits based on their liquidity value to the bank," said a senior banker at a private sector bank, adding that this should help banks manage their cost of funds more efficiently and bring greater risk-based pricing to the liability side of the balance sheet.
The banker explained that financial entities attract a 100 per cent run-off factor under the LCR framework and are, therefore, less LCR-friendly for banks. However, under the current framework, lenders cannot offer different rates to financial and non-financial entities within the same tenor and amount bucket. As a result, banks often create separate maturity buckets to differentiate pricing.
Under the proposed framework, lenders would be able to offer differential rates to different depositor categories within the same tenor bucket based on their liquidity characteristics. The banker, however, said the proposal is unlikely to trigger a significant pricing war for deposits in the near term.
"Banks are simultaneously looking at opportunities to mobilise FCNR(B) deposits under the special window announced by the RBI. If lenders are able to raise FCNR(B) deposits without the associated CRR (cash reserve ratio) and SLR (statutory liquidity ratio) requirements applicable to domestic deposits, there may be less incentive to aggressively compete for deposits by offering higher rates," the banker said.
FCNR(B) stands for Foreign Currency Non-Resident (Bank) deposit. It is a fixed-term account specifically designed for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) to park their overseas earnings in India.
Experts have also pointed out that the proposal could benefit banks with a higher share of low-cost current account and savings account (Casa) deposits, as they would have greater flexibility in pricing bulk deposits. Banks with weaker Casa franchises, however, may face constraints in competing on rates.
"The proposed norms may provide some flexibility in pricing, but they are unlikely to materially change the competitive landscape. At present, CD (certificate of deposit) rates and bulk deposit rates are almost at the same level," said a senior banker at a public sector bank.
"Banks with low Casa will find it more challenging to mobilise deposits as they may need to offer higher rates. Those with a strong Casa base have an advantage because their cost of deposits is lower, allowing greater flexibility in pricing. Competition for corporate deposits is already strong, with banks bidding for funds through a well-established quotation process," the banker added.
"RBI's proposal to permit banks to offer differentiated rates on bulk deposits based on the liquidity risk will help the lenders better manage their asset-liability mismatches and price their deposits in line with their liquidity risk. This would enable banks to price stable and less stable bulk deposits differently and manage their cost of funds effectively. In addition, increased disclosure requirements will enhance the overall transparency of the rates offered to different kinds of customers," said Sachin Sachdeva, vice-president, sector head - financial sector ratings, Icra Ratings.
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