Banks continue to offer higher rates to woo deposits

The deposit mobilisation drive of banks launched in March, ahead of the financial year-end 2004-05, has extended to the first two weeks of the current month.

Bankers on Friday said they continued to mobilise deposits in order to meet the strong growth in credit off-take.

"The deposit market is still very hot. This is very surprising," said a treasury official with a private sector bank.

"Even some nationalised banks are competing with private banks to raise floating rate deposits."

Bankers said their pursuit to maintain a healthy asset-liability ratio is still on, which is pushing up the interest rate on deposits. "This momentum would decelerate within a week," said a treasury official with another private sector bank.

Several banks hiked the interest rates for bulk-deposit rates to around 6.25 per cent for 1-2 year deposits from 5.5 per cent in the beginning of March.

The rate on one-year certificate of deposit was at 6.25 per cent today, against 6.10 per cent in February. CD rates have declined slightly in the last few days because mutual funds have been big investors in these instruments. Mutual funds have been receiving big inflows into their short-term plans, which they invest in instruments like CDs.

According to analysts, some banks that are set to tap the capital market soon to raise equity, were also on a deposit mobilisation drive. Allahabad Bank, Bank of Baroda and Oriental Bank of Commerce are planning to tap the market with their second public issue in the current financial year.

"Banks have increased the deposit rates from an average 5.25 per cent in November to 6.90 per cent in March to have a comfortable liquidity position," said a dealer with a state-owned bank.

Punjab National Bank, which came out with a second public issue last month, raised the interest rates on 180-day to 3-year deposits to 6.15 per cent from an average of 5.25 per cent in March.

Bankers said that with credit growth outstripping deposits, banks were likely to be aggressive with deposit mobilisation.

In 2004-05, credit off-take from banks grew by Rs 2.26 trillion, against a mere Rs 1.66 trillion growth in their deposits.

According to a dealer with a state-owned bank, some small banks are offering high interest rates to retain the deposits that are about to mature shortly.

These banks were ready to shell out higher rates""around 0.50 per cent more""than those offered by large state-owned banks.

According to dealers, an across-the-board hike in the interest rates on deposits is likely after the Reserve Bank of India announces its annual policy on April 28.