Banks look to ramp up term deposits

Banks are garnering term deposits with a renewed vigour, as such deposits help correct the asset-liability mismatch to some extent and impart stability to deposit base.

State-run banks, with the largest repository of low-cost deposits such as current and savings accounts, are ready even to take the risk of an increased cost of deposits as term deposits help reduce deposit base volatility.

"The CASA (current and savings accounts) deposits which are around 40 per cent, would be difficult to improve on from these levels. Even maintaining CASA at this level will be a challenging task," said T.S. Narayanasami, chairman and managing director, Bank of India.

Share of current and savings accounts in state-run banks' total deposits range from 35 per cent to 42 per cent. Such deposits can be withdrawn anytime and banks offer 3.5 per cent on savings bank deposits.

As opposed to this, banks offer fixed deposits with tenures ranging from 7 days to 5 years and above. Majority of these come in the 1-3 year bracket, with 8.5-9.0 per cent interest rate.

Since the interest rates are higher, customers park funds in term deposits rather than savings deposits.

Another advantage of raising term deposits is that they help banks offer long-tenure loans.

"The term deposits are also important in order to maintain the match between asset and liability. However, we would like to maintain CASA at the current level as this has been the strength of the bank historically,"

Sunanda Lahiri, executive director, United Bank of India, said.The Kolkata-based bank is one of those banks that has maintained the share of low-cost deposits at around 40 per cent for a long time.

For the last two years, banks have been finding it difficult to raise long-term deposits, which can match their asset book.

According to the Reserve Bank of India data, time deposits grew 24.9 per cent in 2006-07 compared with 16.4 per cent a year ago. Demand deposits, on the other hand, grew just 16.7 per cent, compared with 26.5 per cent in 2005-06.

In fact, many banks were funding a home loan portfolio of 10-15 years by borrowing via the overnight call money market.

However, banks' lack of adequate deposits to meet loan demand has become a non-issue with a sharp slowdown in credit growth recently. In the first four months of the current financial year, banks' deposits grew by 5.2 per cent, while credit grew by 0.5 per cent, according to data from the Reserve Bank of India.

The strategy of raising more high-cost deposits to ward off volatility in deposit base would, however, put pressure on net interest margin and, therefore, affect banks' profitability.

"If term deposits increase in the total portfolio, then on a conservative estimate, the impact on the margins would be 25-30 basis points," said M S Sundara Rajan, chairman and managing director, Indian Bank.

"In order to protect the margins, we have to price the advances so that the increase in the cost of funds are passed to the customers," Rajan said.

Even if a lending rate hike is not expected, it is clear bankers cannot afford to cut these rates now despite a spike in deposits. Banks will have to continue doing business amid pressure on margins.

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Time deposits grew 24.9 per cent in 2006-07 compared with 16.4 per cent a year ago. Demand deposits, on the other hand, grew just 16.7 per cent, compared with 26.5 per cent in 2005-06

In the first four months of the current financial year, banks' deposits grew by 5.2 per cent, while credit grew by 0.5 per cent, according to data from the Reserve Bank of India

Banks offer fixed deposits with tenures ranging from 7 days to 5 years and above. Majority of these come in the 1-3 year bracket, with 8.5-9.0 per cent interest rate

Share of current and savings accounts in state-run banks' total deposits range from 35 per cent to 42 per cent