After a flip-flop over instructions to public sector banks regarding the cap on corporate bulk deposits, the finance ministry has finally asked them to cap these at 10 per cent of total deposits for the current financial year. From the next financial year, the cap would be increased to 15 per cent, but it would comprise certificates of deposit (CDs) too.
Bulk deposits are usually term deposits above Rs 1 crore, with a maturity of less than a year. In a letter to the banks on July 2, the ministry had said the share of bulk deposits and CDs should not exceed 10 per cent of the total deposits at any given time. Two days later, it sent another communication, saying those were draft instructions and the banks should wait for final ones.
The ministry’s move comes after a rush for these high-cost deposits, especially by public sector lenders, during the January-March quarter end. This resulted in short-term rates shooting through the roof. Rates for three-month corporate deposits went above 12 per cent during the last fortnight of March, as banks scrambled for funds to meet their year-end targets.
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In an advisory to the state-run banks on Friday, the ministry said they should reduce the proportion of bulk deposits, as these were affecting their profitability. It asked them to devise a strategy on how they’d go about bringing down their bulk deposits and CDs.
“They should have a robust plan to bring down such deposits. The asset-liability committees of the banks should consider the issue in their next meeting. It may deviate from these limits only in the case of exigencies,” said a ministry official.
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The difference between the bulk deposit rates and card rates can widen to 200-300 basis points over the short term if the liquidity situation is very tight. If adequate liquidity, the differential can be as low as 25 bps. The percentage of bulk deposits could be as high as 35 per cent of the total deposits for some banks; some others have reduced their dependence on these over time to only 15 per cent of their total.
Bankers said the move would encourage them to get rid of high-cost deposits which accumulated as a result of the race among lenders to meet their liquidity requirements. With the liquidity situation now easing, banks will be in a position to reduce their reliance on such deposits.
“All banks were trying to do that (reduce bulk deposit rates). But a 10 per cent cap is slightly rigid. It could have been kept at 20 per cent for bulk deposits and CDs combined,” said the chief of a state-run bank. Another banker said the move would benefit the sector and the costs should come down. On the other hand, some banks with a large proportion of bulk deposits are worried that such as huge reduction in the deposit base would create an asset-liability mismatch for them.