| Gupta: Taking the plunge
Mumbai, Nov. 11: Punjab National Bank (PNB) today raised domestic term deposit rates by 25-50 basis points. The Delhi-based bank’s move come only days after finance minister P Chidambaram asked commercial banks to increase their deposit growth to keep up with the rise in credit. While deposits in the banking system have been rising at around 20 per cent, the credit growth is over 30 per cent.
PNB’s decision also comes after the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 7.25 per cent in its Mid-term Review of Annual Policy on October 31.
Repo is the rate at which banks borrow from the RBI. The repo hike was a firm signal to banks that they will have to pay more to raise funds from the central bank. Though RBI governor Y.V. Reddy did not raise the reverse repo rate (rate at which RBI borrows from banks) this time, bankers and bond market circles expect a 25 basis point hike in the next quarterly review.
Announcing the interest rate changes, PNB chairman S.C. Gupta said this hike would take care of the hardening of interest rates in the government securities market and the credit pick-up, which have been the key trigger. PNB said deposit rates between 180 days and two years will now be higher by 0.25-0.50 per cent. This rate hike comes just over a month after the last hike, effected by the bank on October 7.
While yields on the benchmark 10 year security are now ruling firm at 7.60 per cent, bankers are not forthcoming on whether the PNB move will be followed by others as well. Observers, however, expect public sector banks to hike deposit rates in the coming days.
In a meeting with banks early this week the finance minister told banks that deposit growth needs to be in a range of 25 to 30 per cent to sustain a credit growth of around 30 per cent and also asked the Indian Banks’ Association (IBA) to come up with a policy suggesting concrete measures to boost deposits.
He said credit growth has been growing at a fast clip and the challenge before banks is to meet that growing demand.
Senior bankers do admit that given the current strong demand for credit, there is pressure on them to look for other sources of funds apart from deposits. While many banks could earlier sell the government securities which they must hold as part of the statutory liquidity ratio (SLR) guidelines, the headroom is limited as the excess holding over the mandatory 25 per cent is only a few percentage points.
In such a scenario, it was felt that banks will have no other option but to raise interest rates on deposits so as to fund the growing demand for credit.