Bulk deposit rates crash

Surplus Liquidity In Banking System To Blame For Low Rates

BULK deposit rates — interest on deposits over Rs 1 crore — have come crashing down, following surplus liquidity in the banking system. Banks are offering rates as low as 1% for oneweek deposits and 5% on one-year deposits.
    The liquidity overhang is on account of no auctions being held in the first six days of the current financial year (FY10), even as RBI redeemed Rs 40,000 crore of government paper. Also, liquidity tends to rise in an election year due to increased government spending.
    That the system is flush with funds can be gauged by the amount of money parked by banks with RBI under the reverse-repo window. On Monday, banks parked Rs 1,22,000 crore with RBI, on which they received interest of 3.5%.
    Market observers say the huge liquidity in the system is forcing banks to discourage bulk deposits. Delhi-based Punjab National Bank has lowered its card rate on bulk deposits to 5% from 6.5%, and is accepting seven-day deposits at 1%. This is among the lowest rate offered by any bank.
    In the beginning of the current calendar year, Indian Banks' Association (IBA) had fixed a uniform rate of 7.5% on bulk deposits for public sector banks. However, with liquidity rising, many banks were offering lower rates of 6.5-7%.
    In fact, a mid-sized South-based bank mobilised Rs 1,000 crore by offering 3% for one week. The depositor agreed on such low rates, partly because interest that would accrue by parking the money in the current account would be much lower. Also, the minimum tenure for a fixed deposit is only seven days.
    Treasury heads say interest rates on bulk deposits had marginally increased to 8% in the last week of March due to pressures on banks to meet their deposit targets. However, rates have eased thereafter. Liquidity to stay high
MARKET observers say despite Rs 18,000 crore expected to be sucked out of the system this week through sale of dated g-secs and treasury bills by RBI and buyback of government paper, the fact that banks are usually not aggressive in lending in the first week of a new fiscal will ensure that liquidity remains high.
    Also, due to poor credit growth, banks are flush with funds. In a recent meeting with senior bureaucrats, SBI chairman OP Bhatt said the bank's high SLR of 34% was because corporates had failed to draw on loans that were already sanctioned and a huge deposit mobilisation. This forced SBI to invest in government paper.
    sangita.mehta@timesgroup.com