For past few years, banks have been offering very low returns to depositors and charging very high interest from borrowers. As a result, the gap between lending and deposit rates has widened too much — from 528 basis points in FY04 to 656bps in FY05 and to 751bps in FY06.
However, as banks continue to earn huge profits through high banking spreads, denying the depositors their due share, a big change has occurred in deposits’ structure.
According to the latest data released by the State Bank, term deposits of banks grew 36 per cent to Rs897 billion in 2006 and their share in overall deposits also rose to 30.6 per cent from 25.2 per cent.
This growth in term deposits can rightly be attributed to the frustration of the savers over the very low rates of return they had been receiving on saving accounts.
Not only the volume of term deposits grew handsomely but the number of accounts too increased. In 2006 the number of term deposit accounts rose 20 per cent to more than 716,200.
Such an increase indicates that not only institutions but individuals also shifted from saving to term deposits in the search for better returns.
Saving deposits mobilised in 2006 yielded a weighted average return of 1.92 per cent only. That was why, these deposits grew just three per cent to Rs1241 billion. More importantly, the number of saving accounts fell to 17.84 million in 2006 from 18.51 million in 2005.
The depositors’ decision to keep more money in term deposits was not only aimed at earning higher returns than on the saving deposits. It was also based on the hope that the profit rates on these deposits would grow faster. And this was exactly what happened. The average return on saving deposits crawled up to 1.92 per cent in 2006 from 1.66 per cent in 2005. But term deposit rates rose by far higher margins. See table below.
Bankers anticipate significant growth in term deposits this year also as small banks offer high returns to lure fresh long-term deposits and big banks do the same to retain the existing ones.
The rates of return on deposits vary from bank to bank. And in some cases the difference is so huge that even an old client of a bank feels tempted to switch over to a new bank for higher return. Keeping this in mind, several banks that offer very low rates of return do not advertise their deposit rates widely. To meet the State Bank requirement, they issue a press statement every six months announcing their profit rates on various kinds of deposits but do not bother to place this record on their websites.
Most banks also confuse their clients with their special deposit schemes with catchy titles. Usually these schemes offer a higher return on term deposits than prevailing in the market. But the schemes are so designed that the rates of return rise only with the required minimum balance. And in many cases the required minimum balance runs into tens of millions of rupees, which makes these schemes practically irrelevant for small savers.
Table below shows the profit rates on term deposits of some banks, downloaded from their websites.
As shown in the table, three-year and five-year term deposits of banks still yield much lesser profits than the national saving schemes of equal maturity do.
The government has enhanced the return from 9.17 to 9.25 per cent on three-year SSCs and from 9.24 to 9.54 per cent on five-year RICs. Though the increase is just marginal yet the new rates being much higher than the bank deposits might attract some investment.
But that would come from only those people who do not have access to or expertise and funds volume required for investing in the stock market and in the real estate. Bankers say the nominal raise in the profit rates on SSCs and RICs may divert a tiny part of personal bank deposits.
In December 2006, personal bank deposits stood at Rs1,299 billion but the bulk of them i.e. 40 per cent were owned by medium and large depositors i.e. those having more than half a million rupees in their accounts.