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Living out of interest income? Good new
July, 26th 2006

This is good news for pensioners and those living out of interest income. Interest rates on bank term deposits are set to go up and may even surpass those offered by government small saving schemes.

Reserve Bank of India, in its first quarterly review of the annual monetary policy, has urged banks to mobilise more retail deposits, which have greater durability attached to them. Going forward, sources state that this would also help banks correct the mismatches encountered between assets and liabilities.

A senior official from a public sector bank pointed out that earlier, there was a larger difference between administered interest rates offered on post office schemes and RBI bonds. This led to a lot of investors migrating out of bank deposits in search of greener pastures elsewhere.

However, while these schemes lacked the convenience afforded by bank term deposits. He further added that now, with many players offering 8% on long-term deposits, the differential is clearly narrowing down. This has also eased the pressure on banks to mobilise deposits.

Banks would also require to carry out stringent credit appraisals monitor loan-to-value ratios on a more cautious note. Nageswara Rao, CEO, commercial banking SBU, IDBI Bank, said, Following the policy announcement, credit appraisal will have to be conducted in a more incisive manner.

The loan-to-value ratio is a key indicator for retail liabilities. The loan-to-value ratio essentially implies the percentage of loan sought by a borrower against the price of the purchased property. Typically, the industry-wide LTV stands at 80-85%.

With property prices having gone up significantly, the central banks statement urges banks to exercise larger caution while calculating these ratios. Partha Mukherjee, UTI Banks head-treasury, said, The move, urging banks to exercise larger caution on evaluating the loan-to-value ratio also could be driven by the central banks aim to drive Basel-II compliance among domestic banks.

The RBI has further suggested that ensuring credit quality remains a key priority in the context of financial stability.

In its stance on the monetary policy statement, the RBI has clearly stated the need to reinforce the focus on credit quality and financial market conditions in a manner that would lend assistance to the export sector and investment demands of the economy.

Typically, 55% of the total deposit base of banks comprises term loans. Of this, nearly 50% comes from long-term deposits. Rana Kapoor, MD and CEO, YES Bank, said, We would look at having at least 20-25% of our retail deposits in the long-term bucket by March 08.

The current account and savings account component (CASA) could also lend considerable longevity to the system, provided there is significant tangibility and stickiness in the float products, offered by banks under the CASA bracket.

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