Mumbai, May 24: Banks are likely to hike deposit rates by 50 basis points in 2007-08 to keep pace with the strong demand for credit. This was revealed by credit rating agency Crisil.

Crisil said while there was an increase in low-cost current account and savings account deposits over the past few years, costs have increased because of changes in the composition of term deposits.

According to Crisil, the proportion of bulk deposits (deposits above Rs 1 crore), which carry higher interest rates and have shorter tenures, has increased over the past five years. More than half of the term deposits mobilised in 2007 had tenures of less than one year against less than a third in 2000. This resulted in frequent deposit renewals and exposed the banks to interest rate risks.

Banks increased deposit rates by 60 basis points in the last fiscal to 5.1 per cent. “Several banks were able to fund their credit growth during the past couple of years by selling their excess statutory liquidity ratio (SLR) investments. However, this may no longer be feasible since the average SLR is currently estimated at 28 per cent, just 3 per cent above the threshold limit,” said Tarun Bhatia, head, financial sector ratings, Crisil.

However, the net profitability margin of banks has increased to 1.55 per cent in 2006-07 from 1.32 per cent in 2005-06 despite the 60-basis-point hike in deposit rates.