Financial institutions plan to offer between 11.25 and 11.50 per cent as interest on fixed deposits for one year, only marginally more than the rate offered by banks.
Banks are offering 9 per cent interest for term deposits below one year, as per the Reserve Bank of India (RBI) guidelines, and around 11 per cent for deposits between one year and two years. As the rate is compounded quarterly, the yield works out to 11.46 per cent.
The Industrial Development Bank of Indias decision to raise Rs 1,000 crore through five-year bonds at a coupon rate of 13.5 per cent has already set the tone for low rates. The best we can offer for one-year deposits would be 11.25 per cent, said a senior IDBI official.
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FIs are busy calculating their need for short term funds and the rates at which they can afford to raise these funds after the RBI allowed them to raise term deposits for one year on May 10. Industrial Finance Corporation of India (IFCI) officials feel that an offer of 11.5 per cent will be enough to attract customers.
Institutions have also increased their borrowings from the inter-bank term money market after the announcement of the slack season credit policy which infused further liquidity in the banking system. FIs are raising funds for durations ranging between 90 and 180 days at rates ranging between 8.5 and 9 per cent.
As banks raise funds for these durations at 7 per cent, they are left with a small margin even after meeting the cost of branch operations and fund collection.
FIs will be restricted to state capitals and major towns where their names are recognised by the common investor. They do not have the advantage of the branch network of banks. Besides, the cost of raising fixed deposits with the help of brokers can be extremely prohibitive, an IFCI official said.
FIs will be forced to use brokers to sell their fixed deposit schemes, offering them between 1 and 2 per cent brokerage. They might also consider opening extension offices for the specific purpose of monitoring the work of brokers and marketing the FD scheme, financial circles said.
It is mostly public sector companies which will be attracted by the one-year fixed deposit scheme. Since they park huge funds at a time, a slightly higher rate than the bank rate will be attractive enough for them, said an IDBI source.
The scheme is also expected to be availed by several banks. Capital adequacy ratios of at least eight banks have reached such low levels that they are finding it to difficult to extend large loans.
These banks have been parking a portion of their funds in long-term bonds of public sector undertakings, including financial institutions. But they have been hamstrung by the lack of short-term instruments of PSUs, since they are usually reluctant to put their money in company debentures and fixed deposits.
The one year fixed deposit scheme of financial institutions has thus come as a solution to this problem.