Malla: Rate rejig

Mumbai, Aug. 22: State-owned lender IDBI Bank today launched a floating rate term deposit scheme in which the interest rate will be pegged to the average yield of the 364-day treasury bill of the government.

Interest rate for the new product will be reset every quarter. The minimum amount of deposit will be Rs 10,000 and in multiples of Rs 1,000 thereafter. The maximum investment is capped at Rs 1 crore as this is the definitional threshold for a retail deposit. Further, the floating rate deposit will have a lock-in period of one year and it will be accepted in six maturity slabs, ranging from 1 to 10 years.

According to IDBI Bank, customers can switch from fixed to floating rate term deposits by closing the former at the originally contracted rate, without any premature penalty, subject to certain conditions. While it did not elaborate on these conditions, the bank went on to add that customers will not be allowed to convert floating to fixed rate deposits. However, customers can take a loan or overdraft against the floating rate deposit, a facility that is considered standard for fixed rate deposits.

The bank is the first to introduce such a product after the RBI recently asked lenders to look at such an offering so that there is an effective transmission of monetary policy changes.

IDBI Bank said the scheme would appeal to the retail investors who borrow at floating rates (such as home loans) but invest at a fixed rate, and are therefore exposed to rate risks.

The floating rate deposit will ensure that loans and deposits move in tandem and, therefore, help to partially protect the customers’ asset-liability portfolio from such risks. The bank said in a rising interest rate scenario, customers generally go in for short-term deposits and keep rebooking them as rates move up. These deposits would help to do away with this cumbersome process.

“With the rise in financially literate strata of society, innovation and customer satisfaction have become the key differentiators. Our bank’s floating rate deposit product would allow our customers to take advantage of interest rate changes without closing and rebooking their fixed deposit,” said R.M. Malla, chairman and managing director of IDBI Bank.

But will this product fly?

Past experience shows that the bank could find it hard to drum up a good response. Lenders such as the SBI have experimented with such a product in the past. However, the customer response was tepid and these schemes were eventually withdrawn. In 2010, the SBI had come out with a similar product where the interest rate was linked to its base rate. The base rate is the minimum lending rate, which banks must charge to their customers.

“Such products work fine in a rising interest rate environment. However, we are now in a stage where interest rates have nearly peaked. Customers could therefore be wary of putting their money in such a scheme,” said a senior banker who did not wish to be identified.

“Moreover, the psyche of our depositors is that they prefer fixed and assured returns. Such a product brings about some uncertainty. Many customers, particularly the retired people, may not be comfortable with it,” he said.