Higher term deposits fail to make bankers smile

Banks' term deposits swelled in the last three months, but bankers aren't happy because the increase has come at the cost of low-cost current and savings account (CASA) balances.

A large part of the accretion to fixed deposits till March 16, 2007 was on account of a flight of funds from the low-cost CASA.

In the five fortnights ended March 16, 2007, a whopping Rs 1,23,416 crore was added to the fixed deposits of banks. This alone accounts for 32 per cent of the Rs 3,85,436 crore increase in fixed deposits for the entire financial year 2006-'07. In contrast, the increase in fixed deposits in the whole of 2005-'06 was Rs 2,41,310 crore. 
 

THE RISING COST OF MONEY
Total outstanding  (In Rs crore)	March16,  2007	Dec 29,  2006	%  change
Time (Fixed) Deposits	21,29,845	20,06,429	6.15
Demand Deposits (CASA)	3,74,807	3,81,962	(-)1.8
Cost of funds (in %)	March  2006	March 16, 2007
Deposit rates for over 1yr	5.50-6.50	7.5-9.0
Cost of lending (in %)	March 2006	March  2007
Prime lending rates  (top 5 public sector banks)	10.25-10.75	12.25-12.50
Source: RBI

Analysts estimate that Rs 40,000 crore of the increase in fixed deposits in the five fortnights up to March 16, 2007 would have been deposited in the current and savings accounts had interest rates not moved up sharply in the last quarter of 2006-'07.

The average annual interest cost on fixed deposits would now be around 8 per cent per annum (which would cost banks Rs 3,200 crore) against 2.5 per cent for CASA deposits (which would have been less than Rs 1,000 crore).

This rise in the cost of funds as a result of this shift in deposits is unnerving bankers, who feel it won't be possible to pass on the entire increase to borrowers without risking the quality of their loan portfolios.

In fact, the increase in lending rates over the past few quarters has not been proportionate to the increase in the cost of funds. Peak deposit rates have risen 150 basis points to 9.5 per cent from 8 per cent at the end of December 2006, while prime lending rates have largely increased by 25-50 basis points to 12.25 to 12.50 per cent.