Interest-rate war set to raise cost of deposits for banks

Interest-rate war set to raise cost of deposits for banks
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First Published: Sun, Mar 18 2007. 03 41 PM IST
Updated: Sun, Mar 18 2007. 03 41 PM IST
PTI
Mumbai: Top bankers here have said the rate war among banks, that has pushed up interests on deposits to as much as 9-9.5%, have increased the cost of deposits for lenders.
Anil Khandelwal, chairman and managing director, Bank of Baroda, said higher rates could increase the cost of deposits for banks by 1 to 2 percentage points.
The cost of deposit for many banks worked out to about 4.5-5% last year.
Banks get to collect low-cost deposits by way of savings and current accounts. While banks do not pay any interest on current accounts, the interest on savings account is only 3.5%.
Khandelwal estimated that 40% of total deposits of Bank of Baroda are low-cost, whereas the ratio for the banking industry in general could be about 35%.
Although banks offer a higher interest rate on time deposits, their cost goes down sharply because of low-cost deposits in the form of savings and current accounts.
According to Kishori Udeshi, a former Reserve Bank Deputy Governor and chairman, Banking Codes & Standards Board of India, banks effectively pay only 2.8% on savings accounts and not 3.5% as stipulated, since interest is payable on the minimum balance in the account between the 10th and 30th day of a month.
K Unnikrishnan, senior vice-president, Indian Banks Association, estimated that of the Rs 30-lakh crore of total deposits in the sector, about Rs 20-lakh crore were time deposits (deposits with varying maturities).
He said the typical maturity period of a deposit in a bank is one or two years. Deposit rates started going up from the beginning of the year but the fourth quarter has seen the sharpest rise.
Although banks offer higher interest only on fresh deposits, many depositors liquidate their existing deposits and put the same money in the new, higher-yielding deposit, he pointed out.
According to analysts, the rise in cost of deposits could impact the profits of the lenders but it would differ from one bank to another, as some of them have also increased lending rates.
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First Published: Sun, Mar 18 2007. 03 41 PM IST
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