Finmin wants 15% Cap on Bank Bulk Deposits

The directive, though not final, could lead to higher rates for retail depositors The Finance Ministry has suggested lowering the proportion of bulk deposits to total deposits that state-run banks can have, a directive that could lead to higher rates for retail depositors while reducing the treasury gains of companies.  The ministry, which oversees the operations of lenders in which the government has stakes, has said the reliance of these lenders on instruments such as certificate of deposits and bulk deposits should not exceed 15% of the total deposits. The decision is not final yet and could be changed, said two people familiar with the matter.  The earlier proposed ceiling was 20%. Punjab & Sind Bank, IDBI Bank and Bank of Baroda were among the top lenders in accessing such high-cost funds.  "In order to garner deposits and increase the balance sheet size, banks tend to raise deposits and certificate of deposits at very high rates, which have been very close to 12% per annum," a bureaucrat from the ministry wrote. "This could affect the profitability and the asset liability management of the banks," the ministry said in a note to the lenders giving the rationale behind implementing the new policy.  The government wants the state-run banks to end the practice of raising deposits in March every year to inflate business. This leads to violent movements in interest rates during the January-March quarter. Also, banks offer higher rates for bulk funds from companies and the subscribers of certificate of deposits bought by mutual funds.  In a letter to the chiefs of public sector banks on July 2, the ministry said the share of bulk deposits should not exceed 10% of the total deposits in 2012-13, while the combined share of bulk deposits and certificate of deposits should not exceed 15% at any given time. The ministry has also asked banks to frame a policy and achieve the target by September. The move to cap bulk deposits follows a study by the ministry, which showed a sharp rise of 46% in deposit mobilisation in the fourth quarter of fiscal 2011-12 over the first three quarters. Banks raised . 6,20,000 crore in the first three quarters of the fiscal, while, in the fourth quarter, they raised . 9,05,000 crore.  To woo investors with deep pockets, banks paid 12% on CDs in the last fortnight of March; retail investors were paid 9%. This trend could reverse if the ministry executes its decision. To compensate for the loss of bulk deposits, banks may have to seek thousands of individuals as customers. To draw more customers, the interest rates on fixed deposits and savings rates may have to be increased. "It has been felt that banks are under pressure to mobilise deposits to meet the SOI (statement of intent) targets and this may lead banks to secure high-cost deposits, which may adversely affect the health of the banks," the finance ministry had told banks in March.  sangita.mehta@timesgroup.com