Banks decline to accept high cost deposits
By Neelima Shankar
Mar 20, 2009
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The present economic scenario has prompted the banks to put a check on their high cost deposits. Banks are refusing to accept high costs deposits because they do see adequate options to further use these deposits.

Banks say that the cost of high fixed deposits is more and giving loans at a lower interest rate hampers their profit margins and therefore they are not accepting deposits over Rs 5 crore without the consent of the asset and liability committee (Alco).

A senior official from Oriental Bank of Commerce (OBC) said, "We have directed all branch heads not to accept deposits over Rs 5 crore without our approval. We will accept the deposits only on a case-to-case basis."

Most banks are offering fixed deposit of one year at an interest rate that is above 8-9% and there are additional operational expenses that increase the rate by another 50 basis points. According the banks need keep the lending rate at around 11-12% for a good health and normally corporates do not take loans at such high interest rates. Therefore it becomes difficult for banks to handle their profit margins if they just accept high cost deposits.

"However, most corporate borrowers are not ready to take loans at those rates. The only other option is either to park the fund under the reverse repo window or in government securities, which, again, are not profitable options. So, we have decided the bank would accept a deposit only if there is a demand for a loan. Otherwise, there is no use taking the deposit at 8% and parking it at 3.5% with RBI (Reserve Bank of India)," added the OBC official.

Meanwhile bankers say that they will not be able to reduce their peak deposit rates because even government-administered schemes such as Public Provident Fund and post office deposit schemes are offering an interest of 8%. "In such a scenario, what is desirable that the regulator should provide us more flexibility in pricing our advances," said a Chairman from A PSU bank.

Besides, OBC there are other banks also that are adopting the same policy of refusing to accept high cost deposits.

At the same time banks are also fixing floor rates on loans that are given below their benchmark prime lending rate (BPLR) to protect their profit margins.


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