Seventeen public sector banks may take a hit on profitability because of the high-cost deposits they hold.
These banks’high-cost deposits and certificates of deposit (CDs) have overshot the target (15 per cent of total deposits) set by the Government. Also, they are despite a Finance Ministry directive of September 2012 asking banks to trim such deposits.
The Finance Ministry defines high-cost deposits, also called bulk deposits, as ‘any amount of deposits solicited at rates higher than card rates’. Card rates are those published by banks for various kinds of deposits.
Average cost
According to data collected by the Finance Ministry for the nine months ending December 31, 2012, only seven out of 20 nationalised banks had high-cost deposits and CDs below the target of 15 per cent. Similarly, among State Bank of India and its five associates, two were below the target. Overall, in 17 banks high-cost deposits and CDs form 15.31-36.10 per cent of total deposits, even after recording a significant reduction from the March 2012 level. However, even among the banks that maintained high-cost deposits within the target, the average cost of deposits in all but one (Bank of India) increased in the period ended December 31, 2012.
For instance, the average cost of deposits of IDBI Bank was 8.49 per cent, Punjab and Sind Bank 8.31 per cent, Corporation Bank 8.15 per cent and Vijaya Bank 8.09 per cent — all higher than other banks. Banks are supposed to bring down high-cost deposits and CDs to the targeted level by March 31, 2013. How many banks have succeeded will, however, be clear only when banks publish their results.
Unsustainably high
According to the Finance Ministry’s circular of September 26, the total high-cost deposits (bulk deposits and certificates of deposit) should not exceed 15 per cent of total deposits at any given point of time. “It appeared that, in order to garner deposits and increase balance sheet size, PSBs (public sector banks) tended to raise deposits and certificates of deposit at very high rates, which were close to 12 per cent per annum,” it said. The circular said mobilisation of such deposits at unsustainably high rates would not only affect the profitability of such banks but also their asset liability management, adding that guidelines in this regard needed to be followed in ‘letter and spirit’.
“All concerned may also be appropriately advised that any deviation from the above instructions may be treated as violation of instructions of the Government,” it said.