Leading public sector lender Bank of India (BoI) lost nearly R9,000 crore in deposits in a matter of five weeks when it recently tried to reduce deposit rates. Attempting to cut costs, the bank had pruned the interest rates for deposits with a maturity of less than one year, buckets in which banks typically draw in large chunky deposits from corporates.
The stickiness in deposit rates became apparent when on April 2, BoI, thinking it was comfortably liquid, cut rates on deposits up to one year and for amount of between R1-10 crore by 25-100 basis points. For amounts above R10 crore, the bank trimmed rates by 100-200 basis points. It was shocked by the sudden outflow of money.
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The pinch was so hard, the bank had to roll back the rate reduction in five weeks, a senior official of the bank said, adding the outflow didnt really hurt at the time since the bank didnt need the liquidity. But later, we had to roll back the decision, the official explained.
Indeed, tight liquidity and a market extremely sensitive to changes in interest rates have left major public sector lenders struggling to reduce their deposit rates and consequently, their cost of funds. BoI is not alone: State Bank of India chairman Pratip Chaudhuri told a television network on Thursday: We reduced our deposit rates to 8.5% but we learnt our lesson and came back to 8.75%.
While retail deposits are also sensitive to rates, the large swings in deposits tend to come from the high-cost corporate deposit segment, explain bankers. As corporates try to maximise returns on their cash piles, even small changes in interest rate can push them to move deposits from one bank to another.
There are hardly any retail deposits in the less-than one year bucket. Mostly, it comes from the corporate side and that section will not reprice its deposits, if the rate offered is lower than others, said RK Bansal, executive director, IDBI Bank.
IDBI Bank had reduced interest rates on the 91 days to six-month bucket by 50 bps to 7.25% and in the six months to 279 days bucket by 15 bps to 8.5%, this month.
Two other large public sector banks, Punjab National Bank and Oriental Bank of Commerce have experimented with reducing deposit rates. Punjab National Bank cut deposit rates for deposits above Rs 10 crore by up to 200 basis points across maturities. Oriental Bank of Commerce also cut deposit rates by 50 basis points for deposits above Rs 1 crore.
Both banks were not willing to divulge whether they have seen any outflows in these buckets following the rate reduction although they have maintained the lower rates since April.
The lack of flexibility in reducing deposit rates for big-ticket corporate deposits comes against the backdrop of tight liquidity conditions and sluggish growth in low-cost deposits. Leading bankers feel that until liquidity conditions ease, deposit rates and hence lending rates will not drop substantially.
Though we have been able to comfortably raise deposits so far, the liquidity in the system is weak which makes it difficult to tinker with deposit rates, Diwakar Gupta, chief financial officer and MD, SBI, had said earlier.
For the fortnight ended May 17, bank deposits grew 13.37% y-o-y to Rs 68,74,295 crore, according to RBI data release on Wednesday. The central bank has projected deposit growth of 14% for FY14.