Call, put options on bank deposits being weighed

Move to help banks manage surplus liquidity as well as interest rate mismatches.

The Reserve Bank of India (RBI) is considering a proposal to allow commercial banks to exercise call and put option on bulk deposits of Rs 5 crore and above. This will, to an extent, help banks manage surplus liquidity as well as interest rate mismatches.

The central bank is also examining as to whether banks can be allowed the discretion to offer varying rates of interest on bulk deposits of the same quantum and maturity on the same day.

As the situation obtains now, customers, who want to withdraw their deposits prematurely, are allowed to exercise put (redeem) option but banks are not allowed to prepay deposits (call).

Allowing banks to exercise call option (prepay) will help banks if the interest rates move southwards. Further it will also enable them to some extent in managing liquidity.

So far only long term bonds came with both call and put options. The issuer (borrower) exercises the call option by redeeming a bond prematurely while a subscriber (investor) uses the put option.

Normally, in a declining interest rate scenario, the issuer calls back bonds to save on interest cost. On the other hand, it makes sense for a subscriber to exercise the put option in a rising interest rate scenario.

Corporates usually park bulk deposits with banks for short tenure, ranging from 14 days and up to one year, when they do not have any other good deployment avenues. Interest rates on these deposits are normally pegged 25-50 basis points above the bank's card rate.

Currently, a bank cannot discriminate between bulk depositors. It has to offer the same interest rate to this category of depositors across the country on a given day.

If the proposal to offer varying interest rates to bulk depositors passes muster with the central bank, it will prove beneficial for commercial banks.

To stave off competition from rivals, they could offer varying interest rates depending on the quantum and maturity of the bulk deposits. Banks may also enjoy the discretion of offering differential rates to bulk deposits of same quantum and maturity on the same day.