FinMin to stop PSUs' deposit tenders

The finance ministry would write to other ministries, urging them to ensure that public sector undertakings stop inviting bids from banks for making large deposits.

This is an attempt to prevent a repeat of the bidding war for deposits seen in the fourth quarter of 2006-07, which pushed up banks' cost of funds.

Public sector undertakings float tenders, invite bids and bargain for higher interest rates on their deposits. The deposits, usually up to a year, are placed with the bank, which offers the highest interest rates.

When the deposits are due for renewal on maturity, they again go to the bank quoting the highest rates.

The end of the fourth quarter typically sees banks raising high-cost deposits to meet their deposit and credit growth targets.

The finance minister, at a meeting with chairmen of public sector banks in New Delhi today, said letters would be written to other ministries stating that banks have a commercial interest and public sector companies should not make bargaining for a higher rate on bulk deposits a "big deal", a banking executive said.

"PSUs are to be told not to call for bids to stop them from playing one bank against the other," the executive added.

The third quarter of December saw banks, which had stayed away from raising bulk deposits this year, taking recourse to bulk deposits, offering up to 0.5 per cent higher rates than the card rates for large deposits.

"These are issues that have far-reaching repercussions. The PSUs have to call for bids for reasons of transparency. The banks in need of liquidity will have to quote the rates. The bank that quotes the highest will get the deposit. It is up to the government to ponder; let us see how things shape up," said the chairman and managing director of a large public sector.

The interest rates offered on bulk deposits touched 12-13 per cent in March 2007, with a few stray deals struck at ridiculously high rates of even 16-17 per cent as the credit growth outpaced deposit growth.

A senior executive at a large public sector bank said "...there was a deposit rate war. The loan growth was very good. Public sector undertakings were participating in the market. Deposits were auctioned to the highest bidder. There was a tightening in call rates ranging between 16 and 80 per cent."

The Indian Bank' Association (IBA) had tried to prevent banks from being fooled by companies into paying rates that were higher than what competitors were actually offering.

IBA compiled and circulated among member banks bids placed on a particular day for the non-card rate deposits (bulk deposits). This was to stop companies from pitting banks against each other in an attempt to extract higher rates for their deposits.