Simultaneously it has raised the interest rate on the deposits it accepts by a minimum of 0.25 per cent and a maximum of 0.75 per cent across maturities, lest it should be accused of desiring the best of both worlds. Accordingly, it will allow 10 per cent on deposits with a maturity of up to two years. Even after effecting the said hike in the lending rate, it is entitled to claim the moral high ground since its PLR will be lower than the 14 to 14.25 percent that most nationalised banks apply to loans or the minimum 15 per cent that private banks and foreign banks apply to loans.

On the other hand, some nationalised banks and some private banks have been quoting rather aggressively in order to mobilise bulk deposits. According to the financial press, the nationalised Oriental Bank of Commerce has reportedly quoted 11 per cent to ONGC (Oil & Natural Gas Corporation) on a bulk deposit of one year maturity. It is ironical that while oil marketing companies like the Indian Oil Corporation (IOC), HPCL and BPCL are facing a cash crunch and hence are engaged in raising money for shorter maturities at between 11 and 11.25 per cent, the oil producer is flush with funds. (Of course we know the reason behind this incongruity – the oil marketing companies are simply not allowed by the government to effect full pass through of the market price in respect of oil). Be that as it may, cash-rich VSNL and SEBI are also said to have parked huge sums with banks at lucrative rates. With the staid SBI offering 10 percent on a one-year deposit, it is feared in banking circles that interest rate on short-term bulk deposits may be hiked to 11 per cent by the other banks.

The question that arises now is whether our banks are so short of funds that they have to raise interest rate to such levels even on short-term bulk deposits. It cannot be true. Hiking interest rate on advances and deposits simultaneously can significantly benefit only banks with a credit-deposit ratio - in excess of cent percent. By and large, the credit-deposit ratio of most banks is at the sub-100 per cent level. Even assuming the ‘worst case scenario’, is it not possible for the banks to raise money at lower rates? Why not banks reward the savings bank (SB) account holders better? Presently they allow a measly 3.5 per cent by way of interest on SB account balances (vide, ‘Savings Bank: A bummer deal’, dated March 19, 2007). In realistic terms, it works out to 2 or 2.5 per cent given the modus operandi of computation of interest in respect of savings bank accounts. Banks allow interest on the minimum balance obtaining between the tenth and the last day of the month and even the interest so computed is rounded off in favour of the bank. Banks may counter this suggestion by arguing that it is not in their hands to hike interest rate in respect of SB accounts (interest rate in respect of SB accounts is administered by the Reserve Bank of India or RBI). Although it is true, nothing prevents the banks from taking up the matter with the RBI. Have they ever attempted such an exercise?

On the other hand, they go out of the way to find ways and means of funding the cash-rich corporates and the high net worth individuals (HNI) at sub-PLR rates. Even the RBI Governor has regretted the fact that cash-rich corporates are able to avail of funds at sub-PLR levels while the common man has to pay through the nose for bank funds. Unlike the cash-rich corporates or HNI, the common man’s withdrawal from his SB account is need-based and therefore always a credit balance is available in his account for the bank to exploit. In the circumstances, banks will do well to allow interest at least at the rate of five per cent to SB account holders.