With liquidity flushing into the system, banks are discouraging bulk deposits and thereby slashing interest rates by a large extent. Banks are offering as low as 5% on one year bulk deposits.
The system is filled with liquidity can be viewed through the banks move of parking Rs 1,22,000 crore with RBI through the reverse repo window. Banks are going to earn an interest rate of 3.5% on these funds.
It is this liquidity that is prompting bank to discourage bulk deposits and therefore they are cutting down interest rates on these deposits. State-run, Punjab National Bank (PNB) is offering the lowest card rate in the market. The bank has lowered the bulk deposit rates from 6.5% to 5% per annum and is only paying 1% on a seven day deposit.
In January, Indian Banks' Association (IBA) had set a uniform rate of 7.5% on bulk deposits for public sector banks but with rise in liquidity banks are reducing the rates. Recently a bank accepted a bulk deposit at an interest rate of just 3% and depositors agreed on such a low rate because money kept in the current account would enable him to earn much lower interest and moreover the tenure of the deposit was just 7 days.
During the last week of March 2009, bulk deposit rate had increased to 8% because banks were under pressure to meet their deposit targets for the fiscal. But after that the interest rates started easing.
In fact banks were willing to lend aggressively during the starting of the fiscal, which proved to be a clear signal of ample liquidity in the system. However market observers say that around Rs 18,000 crore are expected to move out of the system due to sale of government securities and treasury bills that are due for this week.
Meanwhile where banks are keen on lending, credit demand has been low thereby increasing the liquidity in the system. SBI's Chairman, O P Bhatt said that they have maintained high Statutory Liquidity Ratio (SLR) of 34% since there was a huge deposit mobilization and the corporates also did not draw the loans that were already sanctioned.
The head of treasury says that a sudden decline in the collateral based borrowing and lending obligation (CBLO) rate - rate at which banks borrower from each other against securities - also resulted in the fall of bulk deposit rates.
Bulk deposits are deposits over 1 crore.