The Reserve Bank of India has allowed banks to offer differential interest rates on term deposits. The RBI notified that term deposits of Rs 15 lakh and below must have premature withdrawal facility. For deposits above Rs 15 lakh, banks may or may not offer premature withdrawal.
RBI also says banks must disclose schedule of rates payable on term deposits in advance. “Banks can use differential interest rates linked to withdrawal facilities,” the note says. RBI adds that banks must have a board approved policy with respect to interest rates on deposits.
VR Iyer, CMD, Bank of India, says the facility of early withdrawal is already being offered now, only thing is the rate of interest that is payable is for the expired period. Now, RBI is saying, banks can offer differential RoIs based on withdrawals. She says that deposits that are withdrawn prematurely in the below Rs 15 lakh range are not too heavy right now. Hence the impact may not be too significant. The immediate benefit is that the asset-liability mismatch may be better managed.
But for bulk deposits, impact on banks will be significant because that constitutes 38-40 percent of any bank today.
Below is the verbatim transcript of VR Iyer's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: The policy note announced three months ago has been notified today. Will you jump at the prospect? Is it a very good idea to offer deposits with different rates? How do you think it will be received?
A: The facility of premature withdrawal is already being offered now. The only thing is the rate of interest that is payable is for the expired period. Now, Reserve Bank of India (RBI) says that you can offer differential rate of interest based on withdrawals. What will happen is for the same amount and the same period bankers will offers two different rate of interest. One where the withdrawal, the depositor is able to anticipate then that can be a lower rate of interest and which is not withdrawal can be at higher rate of interest. However, my own experience is that the deposit getting premature is not very heavy today and so the impact may not be very significant because of this notification.
Latha: You are unlikely to announce a product?
A: We will come out, only thing is that the immediate benefit which I can see is the asset liability mismatches can be better managed. You can have a liability profile which is more known to the bankers that it will not get withdrawn. That is the only benefit that I foresee immediately.
As such if you see unless interest rates are going to be highly volatile I won’t see significant impact on account of this notification. However, we will definitely have an offer, we will definitely come out and this is offer for the amount below Rs 15 lakh. If it is offered for the bulk amount then the bankers would stand to benefit because that is the area where they see a lot of volatility and the rate sensitivity prevailing there.
Latha: The notification says that all term deposits of below Rs 15 lakh should necessarily have premature facility. However, the option is available for all deposits.
A: Then it makes a tremendous difference. If it is there for bulk amount then it is going to be a significant impact on us because bulk deposit almost constitutes around 38-40 percent for any bank. When a bulk deposit say is Rs 10 crore and above it constitutes almost 36-40 percent and that is always sensitive to the interest rate and that keeps jumping from one bank to another bank. So, there we will have a significant impact.
Latha: So you would even expect your margins to improve a little bit?
A: Margins can have some impact. It depends upon how we price periodically and how a particular bank depends on the bulk deposits. Bank which is less dependent will always stand to benefit by this. However, it will definitely give a steady approach to the bankers of what would be the bulk deposits that we can retain. It is a good move from that point of view.
Latha: What do you expect will be the reaction from depositors, we have just got the March 31 data and that says that last year was the most abysmal deposit growth in nearly 20 years since 1996. Will this in any way improve deposit collection if you can offer something more for non-withdrawable deposits?
A: Yes it will improve, one. Two, the depositors, bulk ones also would have to take a definite call on how the interest rate movements will be there. As on today, if you see the bulk amount everybody prefers to keep lock-in for a higher amount for a period of minimum one year. That is the general preference of the deposit side. So, then in which case they have to take a view of the interest rate and then accordingly do; they will not be able to break. So, then it has to get evolved in how every company which offers bulk deposit, views it and then do it. However, it is good for the bankers.
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