×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Returns on 1-yr bank deposits top those on 10-yr govt bonds

Returns on 1-yr bank deposits top those on 10-yr govt bonds
Comment E-mail Print Share
First Published: Fri, Feb 16 2007. 12 02 AM IST
Updated: Fri, Feb 16 2007. 12 02 AM IST
The cost of one-year money for banks is over 10% while the government is paying only 8.10% for ten-year money. Interest rates on one-year bank deposits have crossed 10% even as the yield on ten-year government bonds is veering around 8.10%. The yield on government bonds has not kept pace with the rise in deposit as well as lending rates.
Commercial banks offer between 9% and 9.5% to individual depositors but bulk deposits of Rs5 lakh and more fetch over 10%. Companies earn even higher rates for parking their excess money with banks. Meanwhile, yields on 10-year benchmark government bonds have touched only 8.10% even after two hikes in the short-term interest rate in October 2006 and January 2007, and an increase in banks’ cash reserve ratio by one full percentage point between December 2007 and now, stamping out around Rs27,000 crore from the banking system.
“This is not a normal situation and we hope that the distortion will be ironed out in the next financial year beginning April as banks slow down their deposit mobilization drive,” says a bond dealer with a company that sells government securities.
Traditionally, commercial banks aggressively mobilize deposits as the financial year draws to a close to support their credit growth. The bulk of deposit mobilization as well as credit growth takes place in the January-March quarter of every financial year.
Another factor that is contributing to the relatively lower yield on government bond was a statutory requirement that forces all banks to invest at least 25% of their deposit liabilities in government bonds. The government has recently removed the 25% floor but it is up to the central bank to reduce the statutory requirement. The Reserve Bank of India is unlikely to do this now, given its efforts to reduce money supply and fight inflation: it believes that a lower statutory requirement will encourage banks to use their resources to grow credit portfolios. Bank credit has been growing around 30% in financial year 2006-07 over a similar growth last year. RBI is not comfortable with such a high credit growth, as it spurs inflation.
With the growth in deposit liabilities, banks need to invest more in government bonds to maintain the minimum statutory requirement. With not too many government papers in the market, the growing demand is artificially suppressing the yield on government bonds as too many banks are chasing too few papers. Over the past year, bank deposits have grown by Rs4,04,318 crore or 22.8%.
“There is a clear disconnect between the credit market and the bond market. Once banks are required to put in less money in government bonds and stop chasing depositors, the distortions will be ironed out,” says the CEO of a large private sector bank.
The “disconnect” is not a new phenomenon. In October 2004 when RBI began its rate- tightening cycle, the yield on 10-year government bonds was around 6%. At that time, the rate on 20-year mortgages was 7.25%, making the cost of 20-year money for a consumer just 1.25 percentage points higher than 10-year money for the state.
Now, a 20-year mortgage costs around 11%, close to three percentage points higher than 10-year government money. “What we are seeing is a swing from one extreme to another. We hope to see sanity returning to the market once the inflation rate is under control and banks rein in their credit growth,” says an analyst with a foreign brokerage.
Comment E-mail Print Share
First Published: Fri, Feb 16 2007. 12 02 AM IST
More Topics: Money Matters | Bonds |