Public sector banks in the country are now refusing to offer high interest rates on bulk deposits. The finance ministry has persuaded the banks on taking few moves and this is also a result of the same. All PSU banks have jointly decided to stop offering high interest rates on bulk deposits. Most corporates that deposit a bulk amount with banks in the view to earn high interest will only be offered card rates, which are offered to retail depositors.
Indian Banks' Association (IBA) said, "The unanimous decision was that for bulk deposits, all PSBs would henceforth quote card rates."
The banks had been hesitant to reduce their lending rates in the past due to high rates offered in both bulk deposits and retail deposits. So now most of them are cutting down on their huge deposits from the bulk market in order to buy dollars and support their international operations in the times of crunch.
Bulk deposits are those deposits where the minimum amount deposited is Rs 1 crore. Most PSU banks are now lowering their lending rates. They were offering an interest rate of 11.5% to12% in a one year bulk deposit. In fact in October this rate had reached to as high as 12.7%. The card rates offered by public banks are at a maximum of 10.5% which they are planning to scale down from the next month.
Even though the IBA has stated a compromise promised by the PSU banks, bankers expect the card rates and bulk deposit rates to merge from third week of November to early December. "The finance ministry has asked us not to offer high rates on bulk deposits in order to make credit available at an affordable rate," said a top level bank executive.
IBA had posted a letter to the PSU banks regarding the bulk deposit rates because the public sector enterprises (PSEs) were following a practice of placing deposits with the banks that offered them highest bids. This was continued even after a recommendation by the government. Finance minister P. Chidambaram has also asked PSEs to stop following the practice of placing funds by calling competitive quotations from banks.
However some bankers feel that this is not an optimum solution for the situation. A senior banker said, "The IBA had written such a letter before. But in practice, many banks choose not to go by such mutual understanding. Unless there is a clear direction from the ministry, it would be difficult to prevent offering high rates in a competitive market."