Accumulation game

Mumbai, Oct. 5: Banks have sparked a rate war as they hunt for deposits at a time when savers are increasingly cramped for options to park their surplus cash.

With the stock markets going into a deep slide, savers have been forced to consider bank deposits as the safest bet in uncertain times. Mutual fund returns have turned negative, small savings schemes have lost their lustre, and gold isn’t a good long-term bet.

Banks are battling their own problems. Short-term interest rates in the money markets have soared to double-digit levels because of a serious cash crunch in the financial system. In their quest for public deposits, banks have started packing their schemes with better rates and features.

Most banks have come out with special deposit schemes to lure customers – and this is one of the main reasons why deposits raised by banks this year have jumped over 20 per cent. The State Bank of India (SBI) — the country’s largest bank — recently offered an attractive interest rate of 10.50 per cent for a new 1,000-day slab. Senior citizens were offered 11 per cent under the new scheme.

Earlier, the bank had just one slab for the period between two years to three years where the interest rate stood at 9.5 per cent. Effectively, the SBI raised the interest rates by a full percentage point.

Last week, Development Credit Bank (DCB) launched its DCB Freedom 1-2-3 fixed deposit. Freedom 1-2-3 offers customers a rate of 10.50 per cent for fixed deposit in the 375- days-to-3-years slab.

Besides the attractive interest rate, the mid-sized private sector bank has tried to lure depositors by announcing that it will not slap penal charges if a depositor presses for withdrawal after 375 days.

Similarly, Kotak Mahindra Bank has announced a special rate of 10.75 per cent for a 390-day deposit product. KVS Manian, group head of retail liabilities and branch banking at Kotak Mahindra Bank, said the product had been a terrific success and the bank had raised deposits of over Rs 100 crore within a week.

Manian said the attractive deposit rates were a reflection of the upward bias in interest rates. “The debt funds are not delivering superior returns and fixed maturity plans are not for the typical retail investor. Given the current state of the stock market, savers are looking for safer asset classes,” he said.

Manian said deposit growth was over 25 per cent this year. Praveen Kutty, head of DCB’s consumer banking group, also said the bank had received a tremendous response to the Freedom 1-2-3 deposit.

He said the product was created on the basis of customer feedback. Most retail depositors were not in favour of banks levying penal charges for early withdrawal.

Kutty also said customers were not pulling out their mutual fund investments and parking them with banks. “This is a stream of fresh money that is flowing into bank deposits,” he said.

In its annual report for 2007-08 published in August, the RBI estimated the gross financial savings of the household sector at Rs 7.35 trillion. Out of this, a sum of Rs 4.06 trillion — or 55.3 per cent — was parked with banks as deposits. Bankers expect this to rise significantly this year.