Floating rates for bulk deposits on the cards?

Chennai: Banks are keen to offer floating interest rates on deposits, as they come under pressure from the Reserve Bank of India to transmit the repo rate cuts to borrowers by reducing their lending rates.

State Bank of India Chairman Rajnish Kumar had, on Monday, suggested that while the bank has linked home loans and cash credit facilities to the repo rate, deposits too should have floating rates.

“For any transmission to happen, it has to happen on both sides. And, as we create flexibility on the liability side to link our liabilities to repo, which is an external benchmark and of all the benchmarks we studied, we decided that this is the most workable benchmark,” he had said.

However, on Tuesday, the bank has, through a research report, clarified that the suggestion of floating rate is more for bulk depositors, or deposit above Rs 2 crore, and not for retail investors.

The report by SBI Research suggested that the RBI should ask banks to link incremental bulk deposits to repo rate as it would help in reducing cost of funds without hurting small depositors and senior citizens.

Recently,. SBI and nearly a dozen public sector banks have announced their intention link their lending rates to repo rate, especially for housing loans.

However, banks fear that linking lending rates alone to an external benchmarking, like repo rate, would create significant asset-liability mismatches.

About 35 per cent of bank liabilities are savings bank (SB) deposit. Further, the banks are also not able to link external benchmark to the entire liabilities, especially time deposits, as the floating term deposits are not accepted by the Indian depositors and have already been unsuccessfully experimented by some peer banks in the country, SBI Research saidi.

"The key to effective transmission, thus we believe, is adjusting either SB or time deposits," the report said.

However, the problem is it cannot be done in isolation by any one bank and has to be enforced by the regulator, it said. "The best option we believe could be that regulator enforces all incremental bulk deposits henceforth to be repo linked/flexible," the report said.

Banks already have discretion to offer differential rate of interest on bulk deposits. Most of the bulk deposits are from institutions.

According to a retired senior official of a private bank, who did not want to be identified, floating deposit rate is not the solution for the time lag in rate transmission.

“One way of reducing the time lag for transmission could be that the cash reserve ratio is earning something. The banks only earn on 96 per cent of its assets, of which 19 per cent earns G-Sec rates. There should be interest on the cash reserve ratio…The RBI Governor had earlier said there is nothing called a free lunch. The same holds good for everyone. This will speed up the rate transmission.”

Further, there is a need to have a highly active interest-swap market–fixed to floating and floating to fixed, to hedge the risk. “Unless we address this, whatever solution we are bringing in for rate transmission will not work,” he said.