Banks float long-term products

Long-term funds are no longer the exclusive domain of insurance companies and provident funds. Banks, which usually prefer short-term funds, too have started floating long-term deposit products to meet loan demand from corporate clients.

The trend is seen across the board. State Bank of India and UTI Bank have launched term deposit products with maturity between 6 and 10 years at 7.75-8 per cent.

According to banks, such long-term deposit products existed earlier as well but were never so popular as they are now.

An added advantage of these products is the tax benefit which these banks will incorporate in the clause once the Central Board of Direct Taxes issue the necessary guidelines. The budget had proposed tax benefit to bank deposits of five-year tenure.

SBI is offering around 7.5 per cent for ordinary citizens and eight per cent for senior citizens. UTI Bank, on the other hand, is offering eight per cent for same tenure.

Banks have been refraining from investing in corporate bonds which used to be the favourite route for corporates to raise longer term funds.

Banks had incurred huge depreciation loss in their corporate bond portfolio as interest rates rose over the last financial year.

Following this, banks have been asking their corporate clients to opt for term loans rather than floating bonds. This has put pressure on banks to arrange long-term funds which they have been shunning till now in a bid to maintain a short term portfolio.

"Usually long-term bonds are the forte of insurance companies. But things have changed with the interest rate scenario. Moreover, going forward this financial year, market expects a pressure on liquidity," said a banker.

Both the government borrowing programme and credit growth will be vying for liquidity. On the other hand, foreign exchange inflows are likely to slowdown given the hardening of interest rates in overseas markets, especially in the US. Therefore, domestic banks are seen mobilising funds for long-term as well.