There is more bad news in store for investors who may have been toying with the idea of retreating from volatile stock market investments to 'safer' fixed deposits with banks. Flush with funds, most banks are cutting interest rates on fixed deposits, or reducing the incentive for deposits of longer tenure.
Market leader State Bank of India announced a 're-alignment' of interest rates on fixed deposits on Monday. It cut the rate on one of the most popular slabs, namely deposits for periods ranging from 1-2 years, by 0.25 per cent to 8 per cent. Though there has been a marginal hike of 0.25 per cent in longer-term deposits, the slab has been extended. Depositors will get 8.5 per cent interest on deposits of 3-10 years (instead of the earlier 8.25 per cent for 3-5 years and above.
However, lending rates -- for everything from home loans to automobile loans -- will remain at the current high levels for at least another three months, bankers say.
Dena Bank's chairman and managing director PL Gairola was blunt: “We have brought down the deposit rates recently by 50 basis points a few days back. We have not only distanced ourselves from high cost deposits, but we want our clients to renew their deposits only at the prevailing rates or terminate them.”
K Ramakrishnan, CMD of Andhra Bank, sees other banks, which have not slashed their deposit rates so far, doing so in a week’s time. Several banks have cut their deposit rates during the last week following the credit policy review, to strengthen their profitability.
"We will watch the demand scenario for advances over the next 3-4 months, before taking a decision on lending rates,” he added while responding to a query after announcing his bank signing a memorandum of understanding (MoU) with Crisil and CARE for rating its corporate customers at reduced rates.
The MoU facilitates the bank customers seeking credit to get themselves rated, which is mandatory for arriving at the customers risk profile, based on which the banks fix lending rate for each customer. The two rating agencies are part of the four rating agencies recognized by the Reserve Bank of India for the purpose.
"We have not been aggressively soliciting bulk deposits from the beginning. However, it is usual for the banks to mobilize bulk deposits in the first quarter of the year. Later, the credit dispensation and deposit mobilization stabilises,” Ramakrishnan said.
The deposit and advances figures for the latest fortnight ended July 20, 2007 show that the demand deposits (current and savings deposits) have taken a knock of Rs 9,672 crore, while Rs 25,685 crore was added to time (fixed) deposits of banks. Banks deposits have gone up by 24.4 per cent year-on-year, against 16 per cent a few months back, while credit growth has come down to 23.7 per cent from 31 per cent over the last couple of years.