Banks fall for term deposits

Higher deposit rates may have lured bank customers to shift from demand deposits to term deposits.

According to the Reserve Bank of India's weekly statistical supplement released on Friday, demand deposits fell Rs 5,909 crore (Rs 59.09 billion) as on January 20 over a fortnight ago. On the other hand, term deposits swelled Rs 15,117 crore (Rs 151.17 billion).

Banks have been raising deposit rates in the last quarter, especially in December. Banks are facing huge problems in mopping up deposits to fund the robust credit demand.

While deposits have grown 14.6 per cent during April-January, credit grew 24 per cent. Therefore, banks were left with no other option than to raise deposit rates to lure more customers.

Several banks, including State Bank of India, increased its deposit rates by 25-50 basis points in December.

Lured by the higher interest rates, depositors shifted their portfolio from demand deposits to fixed deposits.

The story of interest rate hike doesn't end with the deposit rate hike. In order to protect the net interest margin, banks would soon go for a lending rate hike.

While some banks like ICICI Bank and HDFC have already raised the lending rates, others, like State Bank of India, are mulling a rate hike shortly.

SBI chairman AK Purwar admitted that the upward pressure on interest rate continued on the huge credit demand. Tight liquidity, indicated by high call rates, growing borrowing by banks in RBI repo auctions, add to the pressure on interest rate.

Now, with the central bank raising the reverse repo rate thrice in the current financial year to 5.50 per cent, the rate hike regime is likely to become a vicious circle in the short-term.