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Sunday, July 22, 2001













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Changing maturity pattern of deposits

Suresh Krishnamurthy

WHAT do depositors prefer? Term deposits with 1 to 3 year maturities, says a recent report.

At the end of March 31, 2001, a substantially large portion of deposits of scheduled commercial banks of around 47.07 per cent was in the 1 to 3 maturity basket. The maturity pattern of deposits of scheduled commercial banks as they stood at the end of March indeed has lot of good news for banks. A comparison with what it was in March 1998 would make things amply clear.

At the end of March 1998, around 35 per cent of the deposits of all banks excluding foreign banks and regional rural banks was in over 3 year maturity basket. At the end of March 2001, in the case of 22 public sector banks deposits for over 3 year, maturities accounted for 14 per cent. Interestingly, deposits in the 1 to 3 year basket accounted for 39 per cent then has now risen to 47 per cent now. Similarly, less than 1 year deposits which accounted for 25 per cent then now accounts for 39 per cent now.

Strictly speaking, the data are not comparable. This is because the data for March 1998 includes State Bank of India and associates, nationalised banks and other scheduled commercial banks. In contrast, the data for March 2001 includes only 22 public sector banks. However, the data is more or less representative and indicative of the changing maturity profile of deposits.

So, what is there to cheer about for banks? This suggests that the cost structure of banks is changing for the better by getting lower. Not long back, the governor of Reserve Bank of India indicated that one of the hurdles for reducing interest rates is the high cost structure of Indian banks. He also said long-term deposits formed a substantial portion of the total deposit base of the banks.

Overall, he indicated that a reduction in interest rate would hurt the banks. This is because their cost will remain the same since rates on deposits are fixed, while their income will decline in line with the interest rate decline.

Things, however, seems to have changed now. Medium-term deposits now form a substantial portion of the total deposit base. The import is that the impact of a decline in interest rates is now relatively that much less. For the Reserve Bank of India, the structural deficiencies that the apex bank needs to consider when deciding on reducing interest rates are again that much less of an issue.

In the case of investors, the changing maturity profile can be interpreted as investors in banks becoming risk-averse. The risk-averse nature of investors in fixed maturity products has been well chronicled. However, it was assumed that this behaviour would be mainly restricted to credit risk. Perhaps the recent volatility in interest rates is behind this behaviour.

Anyhow, it may be too early to conclude that risk-averse behaviour is behind the changing maturity profile.


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