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Banks smile as investors find FDs juicy

Lured by attractive interest rates on medium term deposits, investors have been shifting their funds from savings and current accounts to term deposits, reports BS Srinivasalu Reddy.

india Updated: May 14, 2007 04:30 IST

Lured by attractive interest rates on medium term deposits, investors have been shifting their funds from savings and current accounts to term deposits. Thanks to this, several banks have also ensured fat balance sheets for next year as well.

Demand for credit also seems to have eased during April 2007, given the rise in lending rates. Outstanding credit fell by over Rs 37,000 crore during the month.

Bank customers have withdrawn a net total of Rs 37,464 crore from passive demand deposits during April, the first month of the fiscal year, while they have added Rs 43,322 crore to the banks’ term deposit kitty, according to the latest weekly data released by the Reserve Bank of India.

In all, banks customers had bolstered the deposit kitty of scheduled commercial banks (SCBs) by Rs 5,857 crore by April 27, taking the total demand deposits, which include those in savings and current accounts for which a little or no interest is offered, down to Rs 3,85,661 crore.

“The attractiveness of time deposits is one of the reasons for the growth in time deposits. We have raised Rs 1,500 of deposits from two schemes of 400 to 500 days during the last month, let alone other deposit schemes in operation,”said KR Pillai, Deputy General Manager of Union Bank of India.

Banks, including those in the public sector, raised deposit rates of one to two-year maturities at least thrice over the last six months to 9 to 9.5 per cent on deposits of 290 days to two-year maturity. Unlike five-year deposits, short-term deposits garnered a huge response from the customers. Banks that faced an acute cash crunch in the last fiscal year are focusing on resource mobilisation this fiscal.

Savings deposits fetch an interest of 3.5 per cent, while banks do not offer any return on deposits in current accounts opened by business firms and companies. With the rise in term deposit rates the difference between the rates offered by savings and term deposits has risen significantly, making term deposits even more attractive.

The fall in demand deposits and eventually outstanding credit is another reason. Usually, banks try to inflate their balance sheets by offering loans to companies for depositing the same with them. Such deposits and advances evaporate in April.

“The governments – the Centre and the states – release unutilised funds under various schemes at the year end, which will be used up in April and May, bringing down the deposits with the banks,” said a senior banker, who wished not to be named.