MFs dangle returns carrot to tempt bank depositors
Given the uptrend in stock markets, MF returns appear more attractive, even though banks have raised rates on deposits by over 200 bps in two years.
By TNN |
MUMBAI: Mobilising long-term deposits is turning out to be a bigger challenge than bankers expected. Mutual funds, which are only a fraction of household savings, are turning out to be major competitors for incremental deposits.
Given the uptrend in stock markets, returns on mutual funds appear more attractive even though banks have raised rates on deposits by over 200 basis points in two years.
As credit grows faster than the rates which bankers bargained for, banks, which fiercely compete for business, are being forced to look at collaborating to develop new strategies to grow the deposit market. CEOs of major banks will be meeting next week to discuss ways to raise deposits — a commodity much need to meet the growing credit demand.
Meanwhile, banks are eyeing at deposits in the range of 1-2 years. ICICI Bank has decided to offer attractive rates for a slightly longer tenure — about one year and eight months or 590 days. ICICI Bank has now started to offer 8.5% for 590 days in addition to its interest rate of 8% for one year and one month (390 days). Similarly, IDBI is looking at raising deposits of over a year by offering 8.25% for 500 days.
“Banks are increasingly facing competition from mutual funds as more investments are flowing in the capital market with the boom in the Sensex,” ICICI Bank ED V Vaidyanthan. This, in turn, has put pressure on banks to offer better rates on deposits.
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YES Bank MD and CEO Rana Kapoor feels that the tax break offered on mutual funds are more attractive than that available on tax incentive on banks deposits. “Thus, instead of increasing rates, we have decided to add on more features such as insurance to our existing deposit schemes to attract more funds,” he said.Allahabad Bank, which was offering 7.25% for three years and above is now offering 7.5% for one to six years. “We are of the view that in the medium term, deposits will not go up, so we have fixed a single rate for 1-6 year tenure,” said Allahabad Bank CMD AC Majahan. A fortnight ago, HDFC Bank also raised rates for deposits slightly over one year by 1% from 7% to 8%.
“Bond yields have come down, although not as much as expected. But at the same time, the demand for credit is driving the need to mobilise more deposits which, in turn, is prompting banks to offer higher rates,” said a senior HDFC Bank official.
Acknowledging that the deposit mobilisation has become a key challenge, Bank of India CMD M Balachandran said that the bank was unable to mobilise deposits at 8% for five years because other banks have announced a similar rate of interest on one-year deposits.
Sources say that BoI is able to raise only Rs 250 crore in the last few months for its 5-year deposit scheme. The bank has raised deposit rates last month to compete with its peers.
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