Deposit market faces crisis of expectations

With short-term rates rising due to a scramble for funds to meet year-end targets, companies are dictating terms on the tenure of deposits.

"Companies are looking for longer maturities, typically one year and above (for bulk deposits), while banks want funds for a short tenure," said B A Prabhakar, executive director, Bank of India.

The reason is that interest rates on bulk deposits are expected to fall from April and so companies want to lock-in funds at today's high rates. Banks, on their part, need deposits only for March to meet 2010-11 targets.

"Short-term rates have peaked and we do not expect them to go up for at least the next two months. Only mutual funds are looking at short tenors, while others, including corporate houses, may be interested in longer tenors," said R V S Sridhar, the head of global markets, Axis Bank.

As one-month deposits are hard to come by, banks are paying 10 per cent for 30-day funds, while the one-year certificate of deposit rate is 10.15 per cent.

Banks, facing a liquidity crunch since August, say fund availability is no longer a problem. Paying 10 per cent on a one-year deposit will dent margins, they say.

Liquidity has improved in the recent months and the amount banks borrow from the Reserve Bank of India has been coming down. So, the expectation is that deposit rates will fall in a few months.

"Banks have a huge requirement as there is a gap (between assets and liabilities), but no investor is interested in the short term because we know that six months down the line there will be a correction in rates. So, everybody wants to put funds for not less than a year. These bulk deposits will become a headache unless you have them in varied maturities," said Ramnath Pradeep, chairman and managing director of Corporation Bank.

Anticipating this, the country's largest lender, State Bank of India, decided not to accept bulk deposits in March. The bank was helped its bond issue, which got an overwhelming response.