Deposit rates rise as players vie for funds

HDFC and Central Bank of India hike long-term rates

Intense competition for funds is putting pressure on players to raise their deposit rates. Housing Development Finance Corporation (HDFC) and Central Bank of India are the first to have declared higher interest rates on longer-term deposits of over 3 years. HDFC has hiked its deposit rates by 25-50 basis points.

The rise in deposits rates for HDFC will be the first in seven year, said HDFC officials. Central Bank of India today announced an increase in longer-term deposit rates by 50 basis points.

Effective August 16, HDFC will offer 6.5 per cent for 3 to 5 year deposits, up 25 basis points from 6.25 per cent. In the case of 5 to 7 deposits, the housing finance major has hiked the rates by 50 basis points to 6.75 per cent under its cumulative option.

HDFC chairman Deepak Parekh said intense competition for resources has built up pressure on hiking deposit rates. The rise in rates is also partly a fall out of the recent increase in lending rates that took place a couple of months back.

Lending rates will, however, remain stable for some time now as the government wants interest rates to remain soft, said Parekh.

Banks' need for resources is profound with the incremental credit-deposit ratio continuing to be over 100 per cent. Central Bank has increased rates on deposits of over three years and up to five years by 50 basis points to 6.25 per cent.

On deposits of over five years maturity, the rates have been raised by 75 basis points to 6.25 per cent. Central Bank has about Rs 60,000 crore of deposits and expects a marginal rise in cost of resources as a result of the deposit rate hike.

Central Bank officials said the decision to raise rates was prompted by the need for longer term resources to meet long term lending. A study by the bank's asset liability committee had showed that a small increase in interest rates would help attract more longer term deposits. Most depositors today prefer depositing money for less than two years.

Union Bank of India expects interest rates to remain stable and considers the move by Central Bank as a step to address the bank-specific issues. Union Bank is considering reduction in its short-term deposit rates of upto 90 days maturity. This is as call rates have fallen and inflation has also declined.

HDFC had deposits of Rs 7,840 crore as on March 31, 2005, which accounted for 21 per cent of the housing finance company's total borrowings. The interest component accounted for 91 per cent of HDFC's total expenditure of Rs 2,154 crore in 2004-05.

HDFC and ICICI Bank, the two biggest mortgage lenders, raised their prime lending rates by 50 basis points in June this year. HDFC general manager Conrad D'Souza had then said the 50 basis points hike in lending rates had neutralised the one percentage point increase in borrowing costs over the last one year.

HDFC and ICICI Bank raised their PLR as their margins were getting squeezed due to a rise in resources costs. Public sector banks are not considering an increase in their lending rates as they still enjoy good interest margins.