Tax waiver on FDs may not up deposit mop-up

Bringing fixed deposits of not less than five years under income tax exemption limit is not enough to augment deposit mobilisation significantly, top bankers said Tuesday.

Banks having a big portfolio of current and savings accounts will prefer not to take such long-term deposits because of higher cost of funds, they said.

Finance minister P Chidambaram has acceded to the request from banks and allowed fixed deposits of five years and above to be included under income tax exemption in the Union Budget for 2006-07 (April-March).

"Now banks will have to make a choice between higher cost of funds and high CASA (current account and savings account) deposits. Banks having 40-50 per cent CASA will not prefer to raise their cost of deposits above the industry average of 5 per cent to raise these long-term deposits," said J. Moses Harding, executive vice-president, treasury, IndusInd Bank.

Banks have a large part of their time deposits in one-year tenure, Harding said.

However, the long-term deposits will help to reduce the asset-liability mismatch, in terms of tenure.

"These long-term deposits will help us to fund long-term infrastructure projects," said M V Nair, chairman and managing director, Dena Bank.