State Bank of India (SBI) chairman Pratip Chaudhuri has requested the Reserve Bank of India (RBI) to consider lowering the minimum tenure for a fixed deposit to three days from the current seven days. That would give banks a better chance at competing with short-term and ultra short-term debt schemes of mutual funds. These typically offer returns of around 7%-plus or thereabouts, having earned this from investments in the call money market, short-term T-bills and Mibor-linked paper. Since banks offer only a seven-day product, corporates are happy to park their cash surpluses with the liquid schemes in MFs for shorter periods of even 48 hours, because apart from the good returns—the schemes are packaged such that the interest is converted into a dividend—transactions can be put through easily.
Since the sums involved are fairly substantial—at least a fifth of the roughly Rs 8 lakh crore assets of the MF industry are accounted for by these short-term schemes—it’s not surprising banks are eyeing them. Of course, they might need to offer a better rate than they do now for seven-day deposits—SBI offers 6.5%—but that might turn out to be cheaper than borrowing in the wholesale market. The cost of wholesale rates had shot up sharply in the early part of the year to well over 10% and money would have been far tighter had the cuts in the cash reserve ratio (CRR)—175 basis points in 2012—not happened. Indeed, banks have been struggling to mobilise deposits; in the fortnight to November 30, deposits grew at just 12.76% yoy, a nine-year low to R64.43 lakh crore. And so far in fiscal 2012-13, they’ve gone up by just over 9%. While households have simply switched to more lucrative assets like gold, companies no longer leave money lying around in their current accounts when their cash flows are crimped. So, while the amount lying in short-term MF schemes might seem small in the context of the system’s total deposits of R64 lakh crore, it would come in handy. Already, the loan-deposit ratio has been trending up—to just under 76% currently compared with 74% a year ago. Should the economy turn and demand for loans go up, banks might fall short of deposits.