Banks may hike 5-yr deposit rates

Liquidity crunch in the banking system and need for additional capital to cope with the new prudential norms of Basle II may see banks hiking the interest rates for five year deposits even as some of the banks are devising ways to raise long term money through floating rate instruments.

The Union Budget has has been this incentive making long term deposits eligible for tax exemption under section 80 C.

Bankers expect long term deposit rates to go up by at least 50 basis points to remain competitive with other long-term investment options. Some of the banks which may lead the band would be IDBI Bank, ICICI Bank, HDFC Bank, Allahabad bank and Canara Bank, said market players.

ICICI Bank, market players said, will soon witness high interest carrying bonds worth Rs 3,000 crore maturing in the coming weeks and this will require the banks to raise funds to meet the maturity. ICICI Bank board is meeting tomorrow, sources said.

As per industry estimates, bank deposits comprise more than 40 per cent of total financial house hold savings and they are considered to one of the core investment options by almost every household.

Although banks are yet to take a call on a possible hike in deposits rates, the budget has offered an incentive to help banks to mobilise more retail deposits, say bankers.

Said IDBI Bank's CEO-commercial banking, GV Nageswara Rao, "At present, investor appetite for long term deposits is quite low. Now, deposit rates of five years is around 7.5 per cent and post office rates are around 8 per cent. Over time banks will up the deposit rates to attract more investors and bring it at par with post office saving instruments."

Said another senior official of a leading private sector bank said, "Banks need liquidity to fund their credit requirements. Deposits, which have been a large source of funds for banks to fund their requirements, have dried up in the recent past. The deletion of section 80 L deduction in the previous budget has impacted mobilisation of retail bank deposits. Since the finance minister has granted the much awaited inclusion of deposit rates under 80 C now, we would raise our deposits rates as it would be an additional source of funds."

Banks have been demanding that deposits should be given tax break under section 80 C. In a pre-budget memorandum submitted by the Indian Banks' Association, banks had demanded that fixed deposits should be included as a part of permissible overall investment of Rs 1,00,000 under Section 80C.

Banks have not been able to mobilise retail deposits for the past one year. This can be underscored by the fact that aggregate deposits has posted a year-on-year growth of 17.6 per cent while bank credit has outstripped the deposit growth rate at 25.3 per cent as per the latest weekly statistical supplement released by the Reserve Bank of India (RBI).