Lender looking to take advantage of glut into bank deposits following government move to tax debt Mfs retrospectively
The union budget's move to remove tax arbitrage between fixed maturity plans and bank deposits by bringing the former under tax net is leading to a rush of funds into bank deposits.
Taking advantage of the situation, State Bank of India, the country's largest government bank, on Tuesday cut short-term fixed deposit rates. It reduced retail deposits rates of 7-179 days by 50 basis points to 7% while for bulk depositors of over Rs 1 crore, it lowered them by 25 bps to 6.25% for 7-60 day tenures, and 6.75% for up to 179 days. This, however, does not imply that interest rates are on the decline as lending and longer-term deposit rates remain unchanged.
Most bankers see the SBI move as a bid to take advantage of the government's latest budget policy that has introduced tax on income – 28.33% for individuals and 33.99% for others – distributed by mutual funds retrospective from April 1 this year. The imposition of tax on such income will do away with the tax arbitrage enjoyed by bulk depositors like corporates, who were regular short-term investors in fixed maturity plans of mutual funds with their temporary liquidity.
Now, with no other options these funds will find their way back to bank deposits and most banks are likely to follow SBI as the shorter-end bulk deposits are more than likely to bulge, said bankers. Of the Rs 10 lakh odd crore in assets under management of mutual funds, debt funds form the bulk at Rs 7.8 lakh crore.
Speaking to dna, SBI's chief financial officer, RK Saraf, said, “We have a comfortable liquidity situation as deposits continue to grow.” Saraf said that the proportionate surge in its loan portfolio was, however, not visible as it would take at least another two or three quarters for the demand to set in even though the government has announced several initiatives to spur growth.
On why the bank left longer-term rates unchanged, Saraf said the deposits of up to 179 days were miniscule, hence the longer-term rates were unchanged which forms bulk of the deposits. SBI's total deposits are about Rs 14 lakh crore. “The shorter term deposits are in single digit as a percentage to our deposit base,” Saraf said. “Longer-term deposits have been left unchanged because bulk depositors like corporates park their surplus funds in shorter-duration investments and SBI is now riding on the hope these (bulk) depositors have no choice with the new tax imposition but to park them in banks,” said a treasurer at a private-owned bank.
According to a senior banker, the cost of banks raising funds through certificates of deposits and corporate through commercial papers would now surge because one set of investors, namely mutual funds, are out of the play with the tax ruling. Currently, CPs and CDs are hovering around 9%.
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