Banks consider raising rates for 3-5 year funds to correct asset-liability mismatch.
The year 2010 could bring some good news for retail depositors. Deposits rates, which have hit record lows, may move up from next month as banks try to narrow the gap between assets and liabilities.
After banks started reducing deposit rates in January, most new retail deposits have been of one-year maturity. Last year, the peak rate was for deposits with a maturity of two-three years.
On the other hand, bankers said that over the last 12 months, a large chunk of loans that were disbursed were for homes and long-gestation infrastructure projects such as power plants. These loans have a tenure of 15-20 years.
“About 70 per cent of new term deposits have a maturity of around 12 months. With most lending happening in housing and infrastructure, banks will be more focused on getting long-term resources, and this can well happen from January itself,” said an executive of a large public sector bank.
“The present asset-liability structure, which is short on liability and long on loans, is a source of worry,” said another banker.
“Five years ago, there was very little exposure to infrastructure. Now, it is 10-12 per cent of the loan book and can reach 20 per cent in the next five years. So, incremental lending to the sector is very high,” said a bank chief.
To erase the mismatch, banks are contemplating an increase in deposit rates in the three-five year bucket from January.
Banks with a more stable liability profile may not have to act immediately.
However, the asset-liability mismatch may grow further as both the government and the Reserve Bank of India (RBI) have asked banks to lend more to the infrastructure sector.
“Infrastructure companies are asking banks to increase the tenure of their exposure to more than 15 years. But bankers are unlikely to oblige as their asset-liability gap is already growing,” said a banker privy to a recent discussion between RBI and five banks.
The only factor that is making banks think twice before hiking deposit rates is impact on net interest margins. Bankers are unsure if a deposit rate hike can be followed by an increase in lending rates as credit flow is rising at 10 per cent, the slowest in 12 years. In contrast, bank deposits are growing at 18.6 per cent, though rates on term-deposits have fallen to 6.25-7.5 per cent from 8.75-10.5 per cent a year ago.
With little credit flow and the economy showing initial signs of recovery, bankers and the government are keen on maintaining a soft interest rate regime. In recent weeks, banks have focused on short-term loans to ensure that the flow of credit is adequate.
In the absence of credit demand, banks have been parking over Rs 1,00,000 crore a day at RBI’s reverse-repo window, used to suck out excess liquidity. But with reverse repo earning 3.25 per cent and liquid funds giving an annual return of 4.75 per cent, they have preferred to drop lending rates on short-term loans.
The lower cost of deposits has helped banks improve their net interest margins during the second quarter of the current financial year. Most bankers said that during the third quarter, margins could improve further as their cost of funds had dropped further. Less margin pressure would provide more leeway in raising deposit rates, at least for some maturity buckets, bankers said.
