Retail depositors beat bulk depositors in the race of interest rate earnings. Some public sector banks are offering better interest rates on retail deposits as compared to the bulk deposits. Banks have cut the bulk deposit rate without touching the interest rates on retail deposits.

The one year bulk deposits of Rs 1 crore in Bank of India and Punjab National Bank are earning 9.50% interest rate while the retail deposits are offered 10%-10.5%.

Corporation Bank and Union Bank of India have decided to cut the interest rates across wholesale as well as retail deposits. The former will offer a maximum rate of 9.5% for deposits in the range of 1-3 years where as the latter is offering a maximum of 9.5% for deposits with tenure of one year to less than seven years and 10.5% for seven-year deposits. These revisions are applicable immediately for both the banks.

Even the largest lender, State Bank of India (SBI) has declared a cut in both retail and wholesale deposit rates with effect from December 1st. The bank has reduced the interest rate for a 1,000-day deposit from 10.5% to 10%. Similarly deposits with a maturity ranging between 3 years and 5 years will earn 9.25% against 9.75% earlier.

However for deposits over Rs 15 lakh, SBI will offer a slightly higher rate than the retail rate but the Union Bank and Corporation Bank will offer same rate for both bulk as well as retail deposits.

Recently the PSU banks chiefs were asked by K Ramakrishnan, CEO of the industry body Indian Banks' Association to cut the interest rate on bulk deposits. Initially the bankers gave a hesitant response to the call but ultimately some of them have reduced the rates. The effect of bulk deposits rate falling behind the retail deposit rates is termed as "temporary aberration" by some bankers.

Chief of a large PSU bank said, "This is clearly a case of mispricing of risk. Interest rates on retail deposits will eventually fall in line with bulk deposits."

The current reduction in rates is noticed due the surplus liquidity in the economy which is further a result of decreased demand for loans. Until early October, 2008 loans were increasing at around Rs 33,000 crore a fortnight but in the past two fortnights this amount is reduced to Rs 14,000 crore. The banks are therefore parking their excess funds with the Reserve Bank of India at an offered rate of 6%.