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Wednesday, Mar 09, 2005

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It's advantage corporates on bank deposit arbitrage

Rukmani Vishwanath

Corporates, for their part, have been quick to seize the opportunity to mint arbitrage money.

Mumbai , March 8

AND you thought lower inflation would mean lower earnings on bank deposits! While this may hold true for the average depositor, it is altogether a different ball game for `triple A'-rated corporates.

With inflation easing to 4.38 per cent and an expected softening in bond yields, the average depositor will be lucky if he can continue to earn the 5 to 5.50 per cent interest on his one-year domestic term deposit.

However, even against the current backdrop, several leading banks, both in the public and private sectors, are understood to be offering a whopping 7 per cent interest rate a year on one-year deposits of top-notch corporates. According to market sources, these rates aren't usually openly declared by banks, and are negotiated on bulk deposits on a case-to-case basis.

Corporates for their part have been quick to seize the opportunity to mint arbitrage money. The triple A-rated corporate borrows funds at a knocked-down sub-PLR rate of 5.50-6 per cent for a one-year loan. The money is then deployed in the 7 per cent one-year deposit, thereby earning a neat spread of up to 1 per cent.

With Basel II norms fast approaching and the financial year-end round the corner, most banks are trying to aggressively grow their balance sheet size. Banks have been actively canvassing to garner deposits, which they might need to meet credit demand.

However, analysts are of the view that the situation is a little tricky at the moment, because there seems to be a slowdown in credit demand.

"We are not seeing the kind of growth in credit we saw a couple of months back. There has been a definite slowdown even if there are some capital expansions happening. It appears that some banks are lending below their cost of funds in the race to accumulate a larger deposit base. If they don't invest their funds wisely, their net interest margins may take a hit in the bargain," said a banking industry analyst.

As per the weekly statistical supplement of the Reserve Bank of India, gross bank credit in the system grew by a mere Rs 5,461 crore during the fortnight ended February 18 to touch Rs 10,56,210 crore. Interestingly, investments by banks in government securities surged Rs 11,000 crore during the same period.

"This is reflective of the fact that credit is not picking up along expected lines and banks have gone back to investing in gilts with the yields being stable in the wake of a softening in inflation," said an analyst.

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It's advantage corporates on bank deposit arbitrage

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