Tuesday, December 7, 2010

Banks Hike Interest Rate To Cheer Depositors

Dear Comrades,

Savers have a reason to cheer as banks have started to revise upwards rates on fixed deposits. On Monday, India’s largest bank, the State Bank of India, raised interest rates on fixed deposits by 0.5 to 1.5 per cent per annum.

Another public sector lender, the Bank of India, has also revised rates on fixed deposits by up to 1 per cent. However, these rates will be applicable only on deposits made on or after December 7.

If you have an existing fixed deposit, you will continue to get the old rate. Other public sector banks are likely to follow suit over the next few days.

Financial advisers suggest that at this point, it may be preferable to go in for short term deposits because rates may increase further. A customer with a long term deposit will get locked in at a lower rate.

“Deposit rates for the overall banking system could go up further as there is still tightness in the liquidity situation of banks,” says Mr Siddhartha Sanyal, economist, Barclays Bank.

“Deposits are not growing fast enough to keep pace with the strong supply in government papers and a likely uptick in credit growth in the busy season. Also, in many cases, the bank fixed deposit rates are even lower than postal deposit rates, so it needs to go up even to match that level,” he adds.

Stock prices of banks fell sharply during the day today, with leading public sector banks such as SBI, Punjab National Bank, Bank of Baroda and BoB down 3.5 to 4 per cent.

Analysts feel that while banks are being forced to raise deposit rates, they will be unable to raise loan rates, thus pushing margins down.

“Deposits are growing at a slower pace than lending, so banks need to attract more of them,” says Mr Bhavesh Kanani, analyst with Sharekhan.

“There may be scope to hike loan rates if the demand increases,” he adds. Indian banks have seen net interest margins — the difference between what the banks charge on loans and what they pay on deposits, of over 3 per cent in the recent quarters.

Such margins are unsustainable, says Mr Vaibhav Agrawal, analyst with Angel Broking. Rates on deposits may increase further, he says. “Before the collapse of Lehman Brothers, fixed deposit rates were as high as 10.5 per cent, whereas now they are just around 8 per cent,” he says.

December 7th, 2010
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