New Delhi, Dec. 28: After lending rates, it’s now the turn of deposit rates to rise. Most public sector banks are exploring the possibility of a hike in interest rate on deposits to mobilise resources for their lending activities.

Prakash Mallya, chairman and managing director of Vijaya Bank, said: “With the Reserve Bank of India raising the CRR, cost of funds have gone up. So most banks are forced to increase their lending rates to maintain margins, which invariably leads to an increase in deposit rates.”

On December 8, to choke off excessive liquidity and squelch inflationary expectations, the Reserve Bank raised the CRR (the amount of cash banks must set aside as a percentage of deposits) to 5.5 per cent from 5 per cent.

Banks are also increasing their deposit rates to attract investors away from the stock market. Oriental Bank of Commerce, Punjab National Bank, Bank of India and State Bank of India are some of the PSU banks who have taken the step towards increasing deposit rates by 25 to 100 basis points. Others like Vijaya Bank have decided to wait and watch.

Vijaya Bank would soon take a call on raising deposit rates to retain depositors and attract new customers. Before deciding on the changes, the bank would take into account how other banks have reacted to the CRR hike and the liquidity situation till March 2007.

A revision in rates seems unavoidable as banks grapple with the issue of how to raise enough resources for lending, said industry analysts.

The demand for loans is high (growing at 30 per cent), while deposit growth (at 20 per cent) is not enough.

A senior bank official also said some private banks were quoting higher deposit rates to attract corporate and high networth individual investors, without actually increasing the interest rate. Which means big companies might end up going for private players, unless PSUs give competitive interest on bank deposits.

According to PNB chairman S.C. Gupta, banks are also ensuring any asset liability mismatch by simultaneously managing their interest spreads through a hike in deposit rate.

But not everyone agrees with that view. Will the hike in deposit rates work? What if everyone does it? “We'll be back to square one,” concedes R.G. Gadkari, General Manager, State Bank of Travancore, while also pointing out that deposits can be inelastic beyond a point when it comes to hiking rates.

Meanwhile, PNB today increased its prime lending rate by a quarter percentage point, from 11.50 per cent to 11.75 per cent. The increased rate will be applicable from January 1.