Deregulation of rates was expected to trigger a hike in existing NRE term deposit rates. But what made banks so aggressive in more than doubling the interest rate is the current high cost of domestic term deposits.
For instance, an interest rate of around 7.50 per cent on NRE deposits is still lower than the interest being paid by bank on domestic term deposits.
The interest on one-year domestic term deposits is now around 9 per cent.
“That way, the cost of funds is not an issue for banks here. This is a win-win situation for all stakeholders,” Mr Nagesh Paydah, Chairman and Managing Director, Oriental Bank of Commerce, told
The smaller banks are more aggressive in hiking NRE deposits rates to 7-9 per cent due to relative lower base than that of big banks.
little to lose
Mr P. Jayarama Bhat, Managing Director, Karnataka Bank Ltd, said that the NRE deposit base is hardly 2-3 per cent of the total deposits.
“The flow under NRE deposits was very meagre. So we have nothing to lose,” he said.
The expected increase in NRE deposits due to rate hike has other advantages, too, for banks.
It is expected to help them deal with present stress on the liquidity, says Mr Shiv Kumar, Managing Director, State Bank of Bikaner and Jaipur.
“The liquidity is little tighter due to advance tax payment. The NRE deposit flow will be a positive factor now,” he added.
The quantum of NRE deposits in the total deposits of banks may hit the growth path now.
According to RBI data, NRE deposits declined by 0.9 per cent at Rs 1,21,229 crore in 2011 compared with Rs 1,22,380 crore in the previous year.