Wednesday, July 04, 2012

RBI Backtracks on Bulk Deposit

India retains high-cost deposit cap for banks
INDIA-BANKS-DEPOSIT:India retains high-cost deposit cap for banks
Reuters / MUMBAI Jul 09, 2012, 18:14 IST

The government is sticking with its order that state-run banks cap bulk deposits and certificates of deposit at a combined 15 percent of all deposits, despite objections from several bankers, four banking officials said on Monday.

In a letter to state banks sent on Saturday, the finance ministry also said banks cannot raise more than 25 percent of their year-end bulk deposit base in the final quarter of the fiscal year, a move aimed at preventing banks from scrambling to meet year-end targets with aggressive interest rates.

The initiative is intended to improve asset-liability management and reduce reliance on high-cost, short-term funds. Bulk deposits are typically large deposits with interest rates 100-200 basis points higher than on retail deposits.

Some bank executives complained that the measure, first communicated to them on July 2, is unnecessary meddling that could crimp lending.

Two days later, the finance ministry appeared to back down, sending a letter to banks that it would issue final guidelines in due course.

However, on Saturday it sent a letter to banks, retaining the initial directive and adding the new measure to prevent banks from rushing to raise bulk deposits in the final quarter of the financial year, which ends in March.

Finance ministry backtracks on bulk deposit cap
diktat banks breathe easier
It had asked govt banks to reduce these and certificates of
deposits to a combined 15% of total deposits
Manojit Saha / Mumbai Jul 05, 2012, 00:42 IST
Just two days after asking public sector banks (PSBs) 
to reduce the proportion of bulk deposits and certificates
 of deposit (CDs) to a combined 15 per cent of deposits, 
irrespective of the present level, the finance ministry on
 Wednesday backtracked.

Bulk deposits and CDs, short-term instruments floated
 to raise money to meet asset-liability mismatches or 
working capital needs, constitute 30-35 per cent for most PSBs.

The ministry asked banks not to have bulk deposits more 
than 10 per cent of total deposits, while CDs were capped
 at five per cent.

Banks immediately voiced concern, as such a move 
had the potential to distort the market.

  • The finance ministry had asked banks not to have bulk deposits more than 10 per cent of total deposits; certificates of deposit were capped at five per cent

  • Banks immediately voiced concern over the instruction, as such a move had the potential to distort the market

  • Bankers also said serious liquidity implications would arise out of such a sharp reduction in bulk deposits

“Such a huge reduction in the deposit base will create asset-liability mismatch for the banks. This will also mean a reduction in the balance sheet size,” said a banker who received both the communications, requesting anonymity.
Following concerns raised by banks, on Wednesday, in another communication, the ministry asked the banks to keep the earlier instruction in abeyance.

Bankers also said serious liquidity implications would arise out of such a sharp reduction in bulk deposits, especially at a time when bond auctions are held regularly to support the government’s huge borrowing programme.
The government plans to borrow Rs 5.7 lakh crore (gross) for the current financial year, compared with Rs 5.1 lakh crore raised last year.

The ministry’s instruction for banks for reducing dependence on bulk deposits was aimed at improving profitability, as such deposits come with a cost.

Banks’ rush for bulk deposit become particularly prominent at the end of a quarter, when they want to shore their balance sheet for meeting targets. In March, due to this rush for these short-term deposits, rates had gone above the roof.

“There is no instruction by (the) Reserve Bank of India on the proportion of bulk deposits to total deposits. Banks have their internal policy on these deposits. These are short-term deposits, primarily meant to bridge the asset liability gap in the short run,” the chairman and managing director of a PSB said, on condition of anonymity.

Of late, the finance ministry has been seen to be involved with the day-to-day affairs of banks. It has also asked them to follow instructions on various issues like loan pricing and consortium lending.

The ministry’s interference has not gone down well with the banking regulator, which has written to the government on the issue.

Finance ministry wants 15% cap on bank bulk deposits

MUMBAI: 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 depositorswhile 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.

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