Banks pull back high-yielding deposit schemes

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Banks pull back high-yielding deposit schemes

Banks have started pulling back high yielding deposit schemes and short- term loans have become cheaper. The market perceives this is to be a change in the Reserve Bank of India's hawkish stance, reports CNBC-TV18.

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Banks have started pulling back high yielding deposit schemes and short- term loans have become cheaper. The market perceives this is to be a change in the Reserve Bank of India's hawkish stance, reports CNBC-TV18.

Attractive deposit schemes are fast being pulled out. Sources at Punjab National Bank say the scheme, which offered 9.5% interest was pulled out on June 30. Other big banks like ICICI , Union Bank of India , Central Bank and Canara Bank are scheduled to have meetings later this week to decide on whether to discontinue some of their high-yielding deposit plans.

"Deposit rates have definitely peaked off, by 50 basis points or so," said Romesh Sobti , Country Representative-India, ABN Amro .

The trigger for deposit rates coming off their highs is the plentiful cash in the banking system. Deposits since April have grown by nearly Rs 37,500 crores. This rapid growth is because the Reserve Bank of India, or RBI's, tight money policy, in the first four months of 2007 led banks to pay high rates to accumulate deposits.

But in the past six weeks, the banking system has become flush with cash, partly because of RBI's intervention in the forex market. Also, RBI is refusing to absorb more than Rs 3,000 crores in its daily reverse repo auctions. This has sent call rates crashing to below 4% and on some days to as low as half a percent.

Bankers thought the lower rates in the market were probably intended to allow the government to raise money cheaply, to buy the 59.7% State Bank of India stake from the RBI. But that stake was purchased on June 29, and still the RBI has chosen not to suck out the money supply this week with any MSS bond sales. This means the call rates are likely to remain soft.

Saddled with costly deposits and insignificant earnings in the call market, bankers are lending the money for short- term loans at lower rates. Sources at State Bank said that short-term rates have fallen by as much as 200 bps.

But barring that promotional offer from HDFC , longer-term loans have not gotten cheaper, because bankers are not sure how long the RBI will allow the cash surplus situation to last.