Public banks face cap on costly year-end deposits
NEW DELHI: The finance ministry mulling a limit on the bulk deposits the state-run banks can raise in the last quarter of the year, worried that the year-end race to window dress accounts through costly bulk deposits can adversely affect profitability and asset-liability management of banks.
In the just concluded financial year, banks raised nearly a third of their total deposits in the last month of the year.
Finance ministry is keen to end this race for deposits that unnecessarily distorts the structure of interest rates.
"..It appears that in order to garner deposits and increase balance sheet size, banks tend to raise deposits and certificates of deposits at very high rates....Mobilization of such deposits unsustainably high rates, is not only likely to adversely affect the profitability of banks but also the asset liability management of bank," said a note sent out by finance ministry seeking views of public sector banks on the proposal.
It has suggested that the bulk deposits raised by the government banks at higher than the published rates (card rate) and certificates of deposits mobilized in the last quarter of a financial year should not be more than 20% of the total deposits mobilized in the year.
In addition, the ministry has proposed that at no point during the year bulk deposits raised at higher than card rate should exceed 20% of the total deposits.
Bank deposits rose nearly 3 lakh crore in the last month of the last financial year, about a third of the total accretion in deposits in the entire year.
The interest rates on certificates of deposits, or CDs, the instrument used by banks to raise bulk or wholesale deposits, rose to a maximum of 11.5% by March, over 150 basis points from the end of December.
The latest RBI data shows that scheduled commercial banks raised nearly 61,950 crore bulk deposits in the fortnight to March 9, against 38,800 crore raise in the preceding fortnight.
Banks sometimes resort to this year end rush to show better performance.
The banking regulator, the Reserve Bank of India, or RBI, has taken note of the wide divergence in the retail and bulk deposit rates. A senior RBI official had said late March that the practice was wrong.
State run banks are not enthused by the dictate, which they say could impact their business.
"Garnering deposits is a market function and mobilization is dependent on market conditions," said a chairman of a public sector bank who did not wish to be named.
Another official with a public sector bank said it could compromise their competitiveness.
"PSBs also have to compete with their counterparts from private sector who enjoy full freedom and are expected to show equivalent growth...These restrictions will be of little help in terms of growth," the official who did wish to named said.
He also added that a large percentage of this was deposit from the state-run companies.
But independent experts said in the long run it could help state run banks by focusing them on stable deposit mobilization.
"If one were to impose a limit that is too low compared to existing levels, it could be disruptive but it could push PSBs to mobilise more granular and stable deposits, improving their funding profile over long run," said Vibha Batra, senior vice president, co-head, financial sector ratings, ICRA.
NEW DELHI: The finance ministry mulling a limit on the bulk deposits the state-run banks can raise in the last quarter of the year, worried that the year-end race to window dress accounts through costly bulk deposits can adversely affect profitability and asset-liability management of banks.
In the just concluded financial year, banks raised nearly a third of their total deposits in the last month of the year.
Finance ministry is keen to end this race for deposits that unnecessarily distorts the structure of interest rates.
"..It appears that in order to garner deposits and increase balance sheet size, banks tend to raise deposits and certificates of deposits at very high rates....Mobilization of such deposits unsustainably high rates, is not only likely to adversely affect the profitability of banks but also the asset liability management of bank," said a note sent out by finance ministry seeking views of public sector banks on the proposal.
It has suggested that the bulk deposits raised by the government banks at higher than the published rates (card rate) and certificates of deposits mobilized in the last quarter of a financial year should not be more than 20% of the total deposits mobilized in the year.
In addition, the ministry has proposed that at no point during the year bulk deposits raised at higher than card rate should exceed 20% of the total deposits.
Bank deposits rose nearly 3 lakh crore in the last month of the last financial year, about a third of the total accretion in deposits in the entire year.
The interest rates on certificates of deposits, or CDs, the instrument used by banks to raise bulk or wholesale deposits, rose to a maximum of 11.5% by March, over 150 basis points from the end of December.
The latest RBI data shows that scheduled commercial banks raised nearly 61,950 crore bulk deposits in the fortnight to March 9, against 38,800 crore raise in the preceding fortnight.
Banks sometimes resort to this year end rush to show better performance.
The banking regulator, the Reserve Bank of India, or RBI, has taken note of the wide divergence in the retail and bulk deposit rates. A senior RBI official had said late March that the practice was wrong.
State run banks are not enthused by the dictate, which they say could impact their business.
"Garnering deposits is a market function and mobilization is dependent on market conditions," said a chairman of a public sector bank who did not wish to be named.
Another official with a public sector bank said it could compromise their competitiveness.
"PSBs also have to compete with their counterparts from private sector who enjoy full freedom and are expected to show equivalent growth...These restrictions will be of little help in terms of growth," the official who did wish to named said.
He also added that a large percentage of this was deposit from the state-run companies.
But independent experts said in the long run it could help state run banks by focusing them on stable deposit mobilization.
"If one were to impose a limit that is too low compared to existing levels, it could be disruptive but it could push PSBs to mobilise more granular and stable deposits, improving their funding profile over long run," said Vibha Batra, senior vice president, co-head, financial sector ratings, ICRA.
In the just concluded financial year, banks raised nearly a third of their total deposits in the last month of the year.
Finance ministry is keen to end this race for deposits that unnecessarily distorts the structure of interest rates.
"..It appears that in order to garner deposits and increase balance sheet size, banks tend to raise deposits and certificates of deposits at very high rates....Mobilization of such deposits unsustainably high rates, is not only likely to adversely affect the profitability of banks but also the asset liability management of bank," said a note sent out by finance ministry seeking views of public sector banks on the proposal.
It has suggested that the bulk deposits raised by the government banks at higher than the published rates (card rate) and certificates of deposits mobilized in the last quarter of a financial year should not be more than 20% of the total deposits mobilized in the year.
In addition, the ministry has proposed that at no point during the year bulk deposits raised at higher than card rate should exceed 20% of the total deposits.
Bank deposits rose nearly 3 lakh crore in the last month of the last financial year, about a third of the total accretion in deposits in the entire year.
The interest rates on certificates of deposits, or CDs, the instrument used by banks to raise bulk or wholesale deposits, rose to a maximum of 11.5% by March, over 150 basis points from the end of December.
The latest RBI data shows that scheduled commercial banks raised nearly 61,950 crore bulk deposits in the fortnight to March 9, against 38,800 crore raise in the preceding fortnight.
Banks sometimes resort to this year end rush to show better performance.
The banking regulator, the Reserve Bank of India, or RBI, has taken note of the wide divergence in the retail and bulk deposit rates. A senior RBI official had said late March that the practice was wrong.
State run banks are not enthused by the dictate, which they say could impact their business.
"Garnering deposits is a market function and mobilization is dependent on market conditions," said a chairman of a public sector bank who did not wish to be named.
Another official with a public sector bank said it could compromise their competitiveness.
"PSBs also have to compete with their counterparts from private sector who enjoy full freedom and are expected to show equivalent growth...These restrictions will be of little help in terms of growth," the official who did wish to named said.
He also added that a large percentage of this was deposit from the state-run companies.
But independent experts said in the long run it could help state run banks by focusing them on stable deposit mobilization.
"If one were to impose a limit that is too low compared to existing levels, it could be disruptive but it could push PSBs to mobilise more granular and stable deposits, improving their funding profile over long run," said Vibha Batra, senior vice president, co-head, financial sector ratings, ICRA.
2 comments:
It is unfortunately true that most of the public sector banks are resorting to this unhealthy practice of garnering high cost deposits from various govt. departments to push unethically their business mix. This is resulting in higher cost of funds and lowering their profitability. This practice of getting bulk deposits from various departments of the state / Central govts is also encouraging corruption at various levels in Banks as well as the govt. departments. The deposits are mobilised by bribing the govt departments often ranging from 0.25% to 2% of the deposits given by them. In order to be able to pay such huge bribes to get deposits, the branch managers often resort to taking bribes themselves or resort to use the customers who pay the same on their behalf and subsequently these customers resort to take advantage of the situation. It is high time that Finance Ministry / RBI should seriously look into these aspects and take appropriate measures befor the PSBs become bankrupt because of their rat race to unethically increase their business mix without simultaneously increasing their profitability.
This is an age old problem & very costly to all. It results in distortion in planning & development related not only to the bank but overall banking system & whole country. For 38 years of service with the bank, i never saw it stopped. And it continues .
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