A few banks refuse to join the rate race

2007-THE YEAR THAT WAS: DEPOSITS

Amid the rush for bulk deposits in the first few months of 2007, some banks preferred to stay on the sidelines, choosing caution over aggression.

For instance, HDFC Bank let go most of its bulk deposits, agreeing to accept only a few deposits for relationship purposes. To balance its assets, the bank securitised a part of its loans.

At the start of April, State Bank of India (SBI) and ICICI Bank, the country's two largest banks, reviewed the situation. They felt the resource-raising madness was over and that interest rates on bulk deposits would drop automatically with credit growth expected to temper between June and September.

However, bulk deposit rates softened by just 25-50 basis points from the peak levels of 11.5-12 per cent in March for one-year deposits. In the corresponding month last year, one-year bulk deposit rates were in single digits. 
 

STRAINED PROFITS Net interest margin (in %)
Bank	Sep '06	Mar '07	Sep '07
SBI	3.02	3.31	2.84
ICICI Bank	2.13	2.57	2.25
PNB	3.86	4.07	3.49
BoB	2.92	3.23	2.95
HDFC Bank	3.80	4.30	4.00

SBI had decided to meet its entire target for non-card rate deposits set for financial year 2006-07 early to avoid a repeat of the rush for deposits during January-March 2007.

The bank has raised over Rs 15,000 crore, at an average rate of about 9-9.75 per cent, by August-end, ensuring that it would not be forced to raise high cost deposits during quarter-ending March 2008.

Meanwhile, banks continued to extend their "limited" period special deposit offers, originally intended for a month. The argument was that it made sense to raise retail deposits.

"If we can raise Rs 4,000 crore of retail deposits every month at a maximum rate of 9.5 per cent, which means Rs 52,000 crore for the year, why should we raise bulk deposits at higher rates," said an official of a public sector bank.

At the start of October, faced with a margin squeeze, banks were under pressure to reduce deposit costs as the rise in interest expenditure outpaced the increase in interest income.

Poor credit off-take since April led to slower growth in banks' net interest earnings.

SBI's net interest margin (NIM) dipped to 2.84 per cent at the end of September 2007 from 3.02 per cent a year earlier as its low cost deposit base (current account and savings account balances) fell to 39.45 per cent from 42.64 per cent.

Peak one-year deposit rates have come down from the 9.5 per cent level to 8.5-8.75 per cent for one-two- year deposits. Most banks have corrected the kinks in the deposit curve with longer term deposits priced higher.

However, SBI and ICICI Bank continue to offer their peak rates 8.5 and 8.75 per cent, respectively, for about one-and-a-half year deposits, to ensure that the short-term segment remains attractive.

Call rates have already started moving up this month, though still within the repo and reverse repo rate corridor. Deposit rates are expected to move up again after January, but with banks still bearing the brunt of raising high-cost resources early this year, the crisis situation of March 2007 seems unlikely.

The cost of deposits for banks is expected to go up further in the succeeding quarters as deposits continue to get re-priced at higher rates.

"Banks cannot set net profit growth, deposit growth and credit growth figures all around the 25 per cent level. There is a cost to raising deposits which affects net profit. Banks would either have to pare deposit growth or take a hit on the profits," said the chairman of a south-based public sector bank.

The frantic pace of credit growth has also slowed with just Rs 1,62,149 crore added to advances against Rs 2,02,421 crore a year earlier, reducing pressure to raise high-cost deposits.

SBI Chairman O P Bhatt, at the bank's last analyst meet, said, "The cost of deposits may go up further by 5-15 basis points. This year, we have planned our liabilities in such a way that during the last quarter (January-March 2008), when the industry will be scrambling for bulk deposits, the pressure on our margins will not be there and the NIM will become bigger. The NIM should move back up to 3 per cent by the financial year-end."