Public sector banks that are known for offering the highest interest rates on bulk deposit have announced a cut in the bulk deposit rates on Monday, January 12th.

The PSU banks have decided to offer a maximum rate of 7.5% for a bulk deposit with one-year maturity. Earlier in December, banks were offering around 9.5% for a bulk deposit and it was reduced to 8.5% by most of the banks on January 1st.

Basically bulk deposits are deposits in excess of Rs 1 crore and mostly they are parked by corporates that have surplus funds.

However in early November, most PSU banks were offering the bulk deposits at card rates and further banks decided to restrict the interest rate on one-year deposit at 9.5%. In fact at this time, retail depositors are also in a state to earn higher interest rate of at least 100 basis points than the bulk depositors. Normally retail depositors earn an interest rate ranging between 8.5% and 9%.

Bank officials say that the retail deposit rates in the industry would only be reduced once the industry leader, SBI cuts its rates. Currently SBI offers 9% on a 1,000-day deposit and senior citizens avail an additional 50 basis point over the card rate.

Presently as the economy has sufficient liquidity, banks are not encouraging bulk deposits and thereby reducing the interest rates, feel treasury heads of some PSU Banks. To justify this view, it can be noticed that banks such as Punjab National Bank (PNB) are offering bulk deposits at rates as low as 7%. They said that banks have not insisted on raising resources because their credit growth has been lower than expected.

RBI's data on credit growth for the third quarter states that the total bank credit was increased by Rs 1,02,947 crore against a growth of Rs 1,11,806 crore in the same period a year ago. In second quarter ending on September 30th, total credit had increased by Rs 1,29,397 crore.

Further banks are also avoiding raising funds through bulk deposits as RBI is offering only 5.5% for short-term deposits parked by banks with RBI. Moreover banks are able to raise funds at nearly 7% for three months via the sale of 90-day commercial paper.

Earlier PSU banks were giving high interest rates on bulk deposits in order to meet the rising demand of loans.