Mumbai: It’s going to be a different March for commercial banks in India. In March, the last month of the fiscal year, banks generally scramble to raise deposits by paying high interest rates to expand their balance sheets. This time around, they are not doing so because their loan growth has slowed down and they do not need high-cost deposits to fund their loan book.
Interest rates on bulk deposits ranged from 11-13% in March 2007. This year, the rates have come down to 8.5-9.5% and are expected to remain in the same range till the close of this fiscal year, bankers say.
No liquidity crunch: Customers in a Mumbai branch of State Bank of India. The total deposit base of the Indian banking industry as on 1 February was Rs30.9 trillion.
A few small banks which have to meet their annual targets for deposit mobilization, however, continue to offer “special deposit schemes” to customers at 9.5-10.5%. Cosmos Co-operative Bank Ltd of Maharashtra is one such bank.
Bulk deposits are offered to corporations for a term of seven days to 90 days in the last quarter of a fiscal year. High networth individuals, too, keep bulk deposits of Rs15 lakh or more around this time, earning high interest rates. Individual banks have their own cut-off levels for bulk deposits. For some banks it could be as high as Rs1 crore.
The main reason why banks are not under pressure to offer high interest rates to attract bulk deposits this year is the slowdown in credit growth. The banking system’s loan advances, after growing at more than 30% for three years in a row, have slowed down to 23% this year. On the other hand, the aggregate deposit growth for 2007-08, so far, has been 19.5%, sharply higher than the 14.2% in 2006-07.
Total deposit base of the Indian banking industry as on 1 February was Rs30.9 trillion, according to figures available with the Reserve Bank of India. In March 2007, the deposit portfolio of the banking industry was close to at Rs26 trillion and out of this Rs1.3 trillion was was mobilized by banks in March alone.
Arun Kaul, general manager, treasury and finance, at Punjab National Bank (PNB), a Delhi-based public sector lender, said: “Unlike last year, there is no liquidity tightness in the banking system now as the credit growth itself has been tempered.”
According to him, companies have not been shopping deposits this March. Among public sector lenders, PNB was offering the highest interest rates on bulk deposits to corporations at 13.20% in March 2007. It has now brought down the interest rate on such deposits to 9.5%.
The situation was very different last fiscal year. Banks were facing severe liquidity crunch as the central bank had sucked out liquidity from the system by increasing the minimum cash reserves that a bank must maintain with the central bank from 5% to 6% between December 2006 and January 2007 when banks were expanding their loan books fast.
“With credit squeeze in some areas as a result of actions to deal with overheating and pricing pressures, there has been some slowdown in credit growth, more so in case of public sector banks. This should provide some relief on credit-deposit ratios and on growing the liability side,” said Sanjay Aggarwal, national industry director for financial services at KPMG India Pvt. Ltd, a tax consultancy and audit firm.
As the fiscal year comes to close, pressures for overall balance sheet growth targets could continue for some, Aggarwal added.
However, Chanda Kochhar, joint managing director of ICICI Bank Ltd, India’s largest private sector lender, does not agree with this. “Many private sector banks, including us, raised significant capital through equity this year. Since the credit growth has come down, there is less requirement of bulk deposits,” she said. According to Kochhar, private sector banks, which were offering 12% interest on bulk deposits last year, are not offering anything more than 9.5% to 10% now.
Public sector bankers say given the competition they face from private sector banks, year-end deposit mobilization as a concept is dead. “Meeting the year-end target is a thing of past now for public sector banks. Unless a bank continuously grows its liabilities as well as assets, it’s very difficult to meet other targets such as key financial ratios,” said a senior official of a large Mumbai-based public sector bank.
“We have our annual targets and it is evenly distributed throughout the year and we don’t have to hurry in March to meet our targets,” said Nandan Srivastava, general manager of Bank of Baroda.