As a measure to meet the year end targets, banks have adopted a tool by hiking interest rates on bulk deposits as compared to retail deposits.

Banks have always been giving higher interest rates on bulk deposits amounting to over Rs. 1 crore. This is because fixed deposits prove to be more cost effective over retail deposits.

But due to increase in liquidity with banks last year by an amount exceeding Rs. 1 lakh crore on a daily basis, the banks had lowered interest rates so as to block the excess flow of money into them. Such was the extent that at certain cases the retail depositors were offered almost 150 basis pints more than the bulk depositors.

With a turn around in the economy, the banks have now started paying bulk depositors with interest rates which are 75-100 basis points higher than what is paid for retail deposits. Banks have started paying around 5.50-5.75% for 3-6 months against 5% that banks are offering to retail depositors. About a month back they were offering 3.5% to bulk depositors for the same time span.

Banks reason their step for hiking bulk deposit rates stating grounds of hike in cash reserve ratio as a liquidity tightening measure by RBI. Also short term rates have increased as most banks have planned on refilling their deposit bag.

On multi-crore deposits for three months, banks are paying 4.5% against 2.5-3% offered in the past.

Last week, a large PSU bank paid 7.25% for one-year deposits of Rs 250 crore against 6.5% that it pays to retail depositors. However, these rates are still cheaper when compared against 8.5-9.5% that banks had paid a year ago.