HYDERABAD: On Thursday, besides the 25 bps repo rate cut, the RBI also relaxed bulk deposits criteria to Rs 2 crore from the current Rs 1 crore. The seemingly innocuous move is part good and part bad and offers a clue as to whether banks will cut rates this month or sit tight until another 25 bps policy rate cut to move the needle. First. the good bit.
The change in the criteria of bulk deposits, which was fixed in 2013, reclassifies existing bulk deposits worth Rs 1 lakh crore with banks as retail deposits, and allows more operational freedom to banks to raise funds, which is essential as currently deposits growth at 8-9 per cent is trailing bank credit growth, which is sprinting at 13-14 per cent.
“As bulk deposits are sensitive deposits, the reduction in their share will help banks to have better asset liability management and price discovery,” said Dr Soumya Kanti Ghosh, Chief Economic Advisor, SBI Research.
Banks offer differential (read higher) interest rates on bulk deposits, which currently account for about 20 per cent of the total time deposits. With the ceiling raised to Rs 2 crore and above, interest rates will be lowered for new and existing deposits, and subsequently interest payments on deposits will fall. Rates are often lower on deposits used to lend to borrowers at higher interest, and the difference between the interest earned and interest paid is the banks’ profit.
The change in bulk deposits classification gives room for banks to raise money at lower cost (and earn higher profit), but it could result in lower deposits growth. “The revision of definition to single rupee deposits will reduce the ability of banks to offer differential interest rates on deposits higher than Rs 1 crore but lower than Rs 2 crore. This can affect their deposit mobilization,” said Karthik Srinivasan, senior VP and group head, Financial Sector Ratings, ICRA.