Private banks coy of small deposits

Urge depositors to invest in mutual funds.

The banking system is going through a phase of liquidity strain, but most private banks are discouraging customers from putting anything less than Rs 1 lakh in fixed deposits.

These banks are advising customers to invest the money (amounting to less than Rs 1 lakh) in instruments such as mutual funds, which provide them a fee earning opportunity as most of them are distributors for various fund houses.

"Be it Rs 25,000 or Rs 1 lakh fixed deposit, the overhead cost is the same irrespective of the size of a single deposit. It makes economic sense to have large amounts as fixed deposits to ensure that the average cost of funds is lower. If we divert people wanting to deposit smaller amounts to other channels, both customers and banks stand to gain," said a senior banker.

Small deposits are not considered cost effective and are only seen as an administrative burden as bankers need to devote the same amount of time for every single fixed deposit account.

On the one hand, banks are finding it difficult to mobilise deposits even as their credit requirements are rising by the day. But banks find it unnecessary to incur a minimal cost on a small-sized deposits, which falls in the range of 4 per cent to 5 per cent.

Even customers are shying away from deposits as banks inform them of lucrative financial alternatives. The retail head of a private bank said the recent 25-100 basis points increase in deposit rates have been effected to attract large sized deposits and not small deposits.

To make up for the loss of resources caused by diversion of small depositors, banks can always tap other sources of funds and the overall cost would be closer to small deposits, another banker said.