Thursday, August 26, 2010

No investors for higher rate FDs

After the Reserve Bank of India raised its key rates on July 27 the banks started raising their fixed deposit rates but in the 15 days to August 13 there has been no improvement in the growth of the deposits.

According to RBI data deposit growth has declined by Rs Rs 8,016 crore in the fortnight to August 13 to a total outstanding of Rs 46,39,595 crore, translating into a year-on-year growth of 14.1 per cent.

RBI in its monetary policy meeting with bankers had expressed its concern over low deposit growth and had told banks to improve their deposit mobilization to avoid any asset-liability mismatch as a result, banks getting signal from RBI raised interest rates on short-and medium-term fixed deposits by as much as 1.5 per cent.

Although, in the 15 days ended August 13 after a temporary decline last fortnight bank credit growth has moved up to 20 per cent mark.

As per RBI data, banks have witnessed credit growth of 20.13 per cent on year-on-year basis at the end of the fortnight. Thus, outstanding bank credit amounts to Rs 33,57,265.34, as against Rs 28,05,224.26 crore at the end of the previous fortnight.

However in the first quarter of the financial year banks credit growth had spiked when telecom firms demanded for the 3G and Broadband Wireless Access spectrum auctions. But bankers are hoping of moderate credit growth in the current quarter. The apex bank had predicted 20 per cent growth in credit for the current financial year.

Many banks have increased their benchmark prime lending rates with an aim to persuade more customers to switch to base rate system. From July 1 banks have introduced base rate system, but till now the customers have not switched to base rate.

Friday, August 20, 2010

Floating rate FD not beneficial for senior citizens

For most of the senior citizens fixed deposit is the most preferred investment instrument as they give assured returns. But banks are launching new floating interest rate regime for fixed deposits and country’s largest lender has taken lead in this by launching the floating rate fixed deposits.

Investing in floating rate fixed deposits might not be as beneficial as the usual fixed deposits. The floating rate FDs return will be linked to the base rate. In India the interest rate scenario is very unstable the rates are revised quarterly or half yearly.

SB Mathur, former chairman of public life insurer Life Insurance Corporation says, “Retired people do not need uncertainty but certainty. It doesn’t matter if returns are a little lesser all they require is assured returns.” He added senior citizens will have difficulty in planning their future income in the floating products regime.

Senior citizens look for risk-free assured returns and easy liquidity in FDs. But the new regime of interest rate will bring in risk factor as returns will be based on base rate, which will change according to RBI’s policy rates, macro-conditions and banks’ other statutory fund costs that could fluctuate nearly every quarter.

From July 1, the base rate system has been introduced under which the banks cannot lend below the base rate. In order to ease the risk, SBI has come up with base fate fixed deposit schemes, which will slowly gain momentum in the coming days, according to bankers.

Allen Pereira, CMD of Bank of Maharashtra points out, “As long as these products are optional, it’s fine. Consumers should have the maturity to choose what they want.”

Union Bank CMD MV Nair said, “People will have to learn to live on market-driven returns unlike the current scenario of assured returns. Since the base rate is linked to inflation, it’s a double-edged sword. Income may go up if prices firm up. But there are chances that they may go down if prices start easing.”

However in all the developed markets, the returns on FDs are linked to the market but in India it is just in initial stage, an optional proposition. If this product is able to make a good start probably the plans with assured returns may be driven out, informed an anonymous senior banker.

“Fixed-rate returns may become history over the next few years as banks are likely to focus more on market-linked deposit rates to reduce the risk of asset-liability mismatch,” he said.

In the Indian domestic market the total deposits in banks account to Rs 46 lakh crore, out of which 65-70% comprises fixed deposits, as per industry estimates.



Currently, total deposit in banks in the domestic market stands at Rs 46 lakh crore, of which 65-70% comprises fixed deposits, as per industry estimates.

Thursday, August 19, 2010

People investing in bank FDs, company deposit schemes

In the past most people preferred to invest in equity market for long term gain but it as been around two years that there has been instability in the equity market which has forced investors to look for safer investment instruments such as fixed deposits. Fixed deposits provide guaranteed safety of money but the returns are lower. Again the interest rates on fixed deposit are rising after the Reserve Bank of India tightened policy rates and banks are raising rates on fixed deposit schemes to garner more low-cost retail deposits.

Most of the big commercial banks such as SBI, ICICI Bank, Axis Bank, HDFC Bank, etc have raised rates on fixed deposits by 50 to 75 basis points. According to marker experts the rates are expected to rise further as liquidity gets tighter and credit growth picks up.

Even the leading non-banking finance companies (NBFCs), such as Shriram Finance and Dewan Housing Finance Company, have also started raising retail fixed deposits interest rates – up to 2 per cent higher than rates offered by banks. Shriram Transport’s fixed deposit scheme, called Shriram Unnati Fixed Deposit, is offering 8.75 per cent per annum interest for a year. Minimum investment requirement under this scheme is Rs 25,000 and the last date of scheme is August 31. Another company Dewan Housing is offering 9 per cent interest on fixed deposits of 1-year tenure.

While most of the banks are offering 5.5 per cent of interest for 3 to 6 months, 6.5 per cent on deposits for 6 months to 1 year and 7.25 per cent for above 1 year.

NS Srinath, executive director (retail) at Bank of Baroda, told Financial Chronicle that the interest rates will move up further. He said, “I see interest rates stabilizing at this level or go up a little. A fixed deposit is definitely a good investment instrument in the short and medium terms. With the volatility in the equity market, fixed deposits in the range of one year is a good bet. It is little premature to say if interest rate hike has led to growth in our deposits. But we have a target of 22 per cent year-on-year growth in deposits.”

According to wealth adviser and certified financial planner, Gaurav Mashruwala, except FD there is no other investment instrument that can give you guaranteed returns. He said, “Equity investment is risky in the short term, but it offers good gains in long run. While FD is a safe bet for short term, there is no return in the longer term.”

Mashruwala say FD is the best investment option for investors in the low or middle tax brackets, mainly falling in the 10 to 20 per cent brackets.

Kartik Jhaveri, a certified financial planner said corporate fixed deposits are safe and very little risk is involved in them also most of the companies are offering good rates.

Tuesday, August 17, 2010

Financial experts say deposit rates can rise further so don’t invest in long term FDs

Banks are raising their lending rates and fixed deposit rates since the time when RBI raised repo and reverse repo rates. Till now most of the banks especially the big commercial banks have raised their loan and fixed deposit rates, the increase by SBI is quite sharp.

After a long period investors in fixed deposits (FDs) will feel happy seeing the rates moving up. But market experts caution the investors in FDs that they should not hurry to invest in FDs aggressively it is just the beginning.

For instance, HDFC Bank has raised rates for 1year and 2 year deposits by 25 basis points to 7.5 per cent and 7 per cent, respectively. Bank has done the biggest rise for 6 months tenure, by 75 basis points.

The SBI has raised its rates between 25 and 150 basis points. The bank has done the biggest rise for the 15-45 day tenure, the rates has been increased from 2.50 per cent to 4 per cent i.e. by 150 basis points.

For 1 year to less than 2 years bank has raised rates by 125 basis points- from 6 to 7.25 per cent. For 181 days to less than a year, the rate has been raised from 5.25 per cent to 6 per cent.

According to financial planners the rate war can get hotter. Govind Pathak, director, Acorn Wealth says, “Don’t invest in FDs of more than one year. Also, don’t invest the entire holding in a single FD.”

He said one can divide large amount into small portions. For instance, Rs 1 lakh can be divided into four deposits of Rs 25,000 each. If the interest rates increase in, say, the next quarter, then you can withdraw the money from two deposits and invest in other higher-paying FDs.

Along with deposit rates the lending rates are also rising. The market experts say banks are reluctantly hiking lending rates because the retail lending has not taken off. According to many the teaser rates can sooner or later be withdrawn.

Currently, SBI is offering a teaser rate of 8% for the first year and 9% for second and third years. After that, the rate will be linked to the base rate. Likewise HDFC is also offering teaser rate at 8.25% in the first year and 9.25% in the second year. Then, the rate will be linked to the retail prime lending rate.

The experts caution home buyers that they should not rush for teaser rates, especially for buying an under construction property. Kartik Jhaveri, director, Transcend India said, “Potential home buyers need not rush to take that home loan, whether it’s a teaser rate or not, simply because it is a 15-20 year decision.”

He says if one plan to buy ready to possess property then going for teaser rates is good idea but for under-construction property a teaser rate scheme is not a good idea as EMI or interest payment of loan will start now. When the loan is disbursed entirely in the next two-three years, the teaser rate might no longer apply.

Jhaveri adds, “You will be stuck with the conditions of the teaser rate scheme that may be adverse compared to the base rate regime.”

SBI has launched a new product – floating rate term deposit linked to the base rate- according to market experts it is a novel idea. But they differ on the point whether retail investors should get into these products or not. Suresh Sadagopan, a certified financial planner says, “The basic reason for investing in a fixed deposit is assured returns. Any product that does not give assured returns is not meant for small investors.”

According to Pathak, director, Acorn Wealth, one can go for this product but only for one or two years. He explains, as interest rates are rising for some time therefore it makes sense to be in these products. Pathak says, “In a falling-rate regime, these may not make much sense.”

SBI under its new scheme is offering a floating rate of 7, 7.25 and 7.5 per cent for 1, 2 and 3 years, respectively. While Housing Development Finance Corporation has two such products- a regular product for individuals and a systematic savings plan.

SBI is offering 6.9-8.25 per cent for different tenures. The HDFC had launched the scheme 6 months back which allows people to invest in parts, just like a recurring deposit. Thus you can invest as little as Rs 2,000 to as much as Rs 50,000 for 24 to 60 months. The rates vary from 7.25 to eight per cent (two-five years). Last year Indian Overseas Bank also introduced similar product.

Thursday, August 12, 2010

Some banks asking to open fixed deposit to be eligible for credit card

After global financial crisis the banks have cut down their credit card portfolios. Now they prefer to issue credit card to people with sound and high income. Some banks have made a new rule that people who earn less than Rs 30,000 a month can not apply for credit card. Moreover they want some “sound” previous relationship before considering the card application.

Two years ago the bank agents used to chase people to sell credit cards and the cards were given free for lifetime. Now banks are charging range of fees, including for joining and annual maintenance.

An HSBC Bank official told Business Line told, “We are issuing cards on a selective basis as it is an unsecured portfolio.”

ICICI Bank is also going slow on cards, with just about five million in circulation now compared with nine million two years ago.

ICICI Bank says, “ICICI Bank issues cards to both customers and non-customers, subject to fulfillment of credit appraisal norms. We have a full suite of cards products, one of which is a Secured Card (which is for customers with an FD).”

The banks are following this trend because all credit card issuing banks had faced defaults when there was slowdown in country economy. Since then banks started picking out a number of defaulting cards.

According to RBI figures, as on May 2010 the number of credit cards in circulation was 19 million low as against peak of 27 million in June 2008.

A senior banker said, “Now, for many banks, it is more a question of being in the card segment rather than making profits.”

Thursday, August 5, 2010

IDBI Bank raised BPLR and term deposit rates

IDBI Bank, a state-owned lender has raised its benchmark prime lending rates.

It has revised its BPLR by 50 basis points and it will be effective from 5 August, 2010.

The bank release said, the interest rates on retail term deposits have also been raised by 25-75 basis points on different tenures. The revised rates will be effective from August 6.

Tuesday, August 3, 2010

HDFC, Central Bank, Allahabad bank raised deposit rates

The Reserve of Bank has raised policy rates therefore banks have started raising deposit rates ranging from 25 to 75 basis points.

HDFC Bank has raised deposit rates by 75 basis points with effect from July 30, the Central Bank of India has raised rates by 50 basis points which have come into effect from August 1.

Other banks that have raised their deposit rates include Lakshmi Vilas Bank and Allahabad Bank by 50 basis points, effective from August 1.

One (1) basis point is equivalent 0.01 percentage point. State Bank of India (SBI) will be raising its deposit rates by about 0.25 per cent in August-September.

HDFC Bank has raised rates of 91 days and 6 months deposits to 5.25 per cent from 4.5 per cent, for tenors of 9 months to 1 year the rates have been revised to 6.5 per cent as against 5.75per cent.

In the coming days more banks are likely to raise their deposit rates. As the banks have started raising deposit rates therefore their cost of funds will also increase as a result the banks will raise lending rates also. Meanwhile, most of the banks are not willing to raise lending rates due to comfortable liquidity but when the credit offtake starts picking up, banks will hike lending rates in home loan, auto and commercial loan segments.

There have been indications that HDFC Bank, the mortgage major might hike the second year lending (fixed) rate by 25 basis points to 9.25 per cent. At present it is offering housing loans at 8.25 per cent fixed rate for the first year (up to March 2011) and second year at 9.0 per cent.

SBI Chairman O P Bhatt told reporters, “There is an upward bias on deposit rates. They should move up by August-September by at least 0.25 per cent.” On the other hand RBI Governor D Subbarao had said after raising short-term lending (repo) and borrowing (reverse repo) rates by 0.25 and 0.50 per cent respectively, “We expect credit to be dearer ... As credit demand picks up, we expect lending and deposit rates to go up.”

Central Bank of India Chairman & Managing Director S Sridhar said “We have lost business for not lending below the base rate of 8.0 per cent, which we were doing it earlier.” Responding to a question, he said, “As of now high cost deposit with us is zero. We have gradually reduced it over a period. We could have mobilized high cost deposits of up to Rs 5000 crore recently, which we have lost to other banks.”