Syndicate Bank has become the first bank to introduce floating rate on deposits _ the rate being linked to the fixed repo rate of the Reserve Bank. The bank has christened the product Syndifloat, and hopes to provide the product to institutional investors initially to hedge the interest rate risk arising out of their investments.
The bank pointed out that the fixed repo rate has a fair degree of correlation with the deposit rates.
Normally, banks offer fixed rate of interest on the deposits and the customers who have locked into such deposits at the lower end of interest rate cycle find themselves unable to encash the benefits arising out of the rise in interest rates during the duration of the deposit.
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Syndicate Bank's scheme envisages that the rate of interest to be offered to the depositors be linked to the RBI's fixed repo rate. The bank believes that customers may find it beneficial to have a hedged product to manage their asset portfolio.
RBI's repo rate currently is 6 per cent_-this rate would be taken as the anchor rate and the deposit products would be priced at a spread ranging from 0.25 per cent to 1.50 per cent.
To begin with, the bank would cater to the need of institutional investors first and then would extend the product to the retail investors. The period of such deposits would also be extended up to one year in due course.
Other banks may follow Syndicate's floating rate deposit structure.
At the moment, the rates are floating on the asset side, but are fixed on the liability side. As a result, when the prime lending rate falls, the spreads of banks suffer because the cost of funds (deposits) remains the same, because it is a fixed rate.