Friday, December 12, 2008

Corporates reinvesting at current rates with banks

The banks are offering interest rates on short and medium-term deposit rates anywhere between 10 and 11 per cent for slabs between one year and 499 days. Therefore corporates have started terminating past deposits and reinvesting them at current rates.

Bankers say that many of the banks are experiencing this situation. Also, corporates, are buying bank certificates of deposits at rates of about 9 and 10 per cent as they have burnt their fingers in the mutual funds.

Even the RBI data points out that the re-pricing is becoming obvious. According to RBIs weekly statistical supplement the gross deposit accumulation have reached to Rs 3.2 lakh crore so far this financial year. However, time deposit accumulation for the same period was Rs 3.9 lakh crore.

According to Bankers some of retail depositors are also resorted to re-pricing their deposits so that they can take advantage of the higher interest rates, meaning that at least Rs 70,000 crore was reinvested. Bankers say that this kind of re-pricing has pushed up the cost of working funds for the banks.

At present cost of working funds for the banks is well over 7 per cent. The reason behind this is that the component of high cost resources in the banking system is on the increase. Around 30-35 per cent of the banking sector’s deposits are valued upwards of 9 per cent. Besides, some of the CD liabilities of the banks are also taken at very high costs.

For instance since the beginning of this fortnight, the 12-month CDs are valued at close to 10.3 per cent. CDs comprise one component of the bulk deposits with the banks. Actually banks and corporates are getting around the Finance Minister’s fiat against bulk deposits through CD floats. This is because, CD pricing is market- determined. This implies that CDs are placed with the lowest bidders. While in the bulk deposits, corporates call for the bids and the deposits are placed with the highest bidder.

Therefore, more and more public sector companies are resorting to subscribing to bank CDs to maximize their returns on investments. As a result, few banks are in a position to bring down their lending rates, below the current level. The lending rates are high is evident from the fact, that “Triple A” rated corporates are increasing short-term resources at rates as high as 13.5 per cent or just 25 basis points above the current prime lending rate of 13.25 per cent.

Nevertheless, bankers added, as more investors are returning to bank deposits as a safe investment, therefore rates will come down in the coming months. They say that in spite of the high CD rates at present, they are at least 200 basis points lower than the rates of August and September last.

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