Concerned over the continuing slowdown in deposit growth, banks have come out with a unique suggestion for increasing their deposits. They have sought the Reserve Bank of India's permission for offering structured deposit products.
The return on these deposits may be linked to certain benchmarks like the Mumbai inter-bank offer rate and even commodities like steel or gold, where there is a scope for appreciation in prices.
This is in addition to a minimum set rate of interest offered on deposits. Depositors will thus be offered a low guaranteed rate of interest, together with the possibility of the value of their deposits increasing substantially.
For instance, banks can offer a structured fixed deposit linked to bullion prices. An individual can thus be assured of a fixed rate of return of about 2-3 per cent on the deposit.
If gold prices appreciate by, say, 8 per cent at the end of the deposit's maturity period, the depositor will get an additional return of 8 per cent. If bullion prices fall, the investor is at least assured of the 2-3 per cent assured return on his deposit.
At the same time, the bank will not lose out as it may be allowed to hedge its position. The CEO of a leading foreign bank said the RBI was understood to be considering the suggestion, as deposit growth was not in line with credit growth. The central bank will however, need to permit banks to hedge their exposure.
"Banks are competing for deposits in a big way and the introduction of structured fixed deposit products will address the needs of a set of customers willing to take risks, with some level of guaranteed returns," said GV Nageshwar Rao, CEO, commercial banking SBU, Industrial Development Bank of India.
There is little doubt that the growth in bank deposits has slowed. RBI figures suggest that the banks are garnering less money for deposits than the amount of loans they have granted.
In 2004-05, banks raised Rs 211,962 crore {(Rs 2119.62 billion) net of IDBI's conversion into a commercial bank} by way of fresh deposits (as on March 18, the last reporting Friday of the year). During the same period, advances shot up to Rs 218,624 crore (Rs 2186.24 billion). The incremental credit-deposit ratio thus exceeded 100 per cent.
Bankers also expect the RBI to lay down a road map for interest rate derivatives as well as credit derivatives in the coming credit policy. Interest rate options have been a long standing demand of bankers.
Interest rate futures have not taken off as the RBI insists that banks can only be permitted to hedge their positions. As banks have an underlying exposure, this means they can only sell in the market.
"We expect the central bank to lay down the road map for interest rate derivatives, especially since there is a need for them, in the wake of interest rate volatility," says Rao.
With banks having had to take a hit on their bottomlines in 2004-05 on account of rising interest rates, most bankers are confident that some form of derivatives will be introduced to enable them to mitigate their interest rates risks.
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