High deposit rates suicidal: PNB chairman

Punjab National Bank (PNB) today said high interest rates on deposits were not sustainable and might prove suicidal for banks.

The bank has, hence, decided not to extend PNB Mahabachat, a term-deposit scheme that gives 9.5 per cent interest a year on a minimum deposit of Rs 25,000 for a period of one year.

Like other banks, PNB had launched the special fixed deposit scheme in February this year to shore up deposits to fund higher credit growth. The scheme will expire on June 30.

"Interest rate of 9-10 per cent per annum on deposits is suicidal," said PNB Chairman and Managing Director K C Chakrabarty. The growth in business, deposits and advances was 22 per cent, 17 per cent and 29 per cent respectively in 2006-07. "Credit growth much higher than deposit growth is not sustainable," he said. He expects deposits and advances to grow 17 per cent and 19 per cent respectively in 2007-08.

Chakrabarty said high interest rates would affect profitability of the bank as people were withdrawing savings prematurely from other schemes to take advantage of Mahabachat. There was no additional resource mobilisation as the same money withdrawn was coming back, he added.

He said higher interest rates would affect the interest margins of the banks, including PNB. PNB had a net interest margin of 4.07 per cent in 2006-07.

Chakrabarty, however, said he did not see any cut in lending rates in the near future. "Interest rates are more or less stable in the short term," he said.

On capital raising plans, he said PNB had headroom to raise Rs 3,000 crore in tier-II and tier-I capital this financial year. But, it may raise Rs 500 crore through tier-I hybrid instruments and Rs 1,000 crore through tier-II bonds this financial year. Chakrabarty, who joined PNB on June 4, said his focus would be on agriculture, SMEs and the retail segment. The bank would also begin a change in its business processing. The staff in the frontline branches devoted 25 per cent of their time on marketing and acquiring new customers, which the bank wanted to increase to 75 per cent by changing the business process through technology, he added.