South Indian Bank, Federal Bank increase deposit rates

MUMBAI: Deregulation of interest rates on non resident term deposits has triggered an interest rate war among banks, with small banks like South Indian Bank and Federal Bank increasing deposit rates. Kerala headquartered Federal Bank on Monday hiked interest rates on one year non resident term deposit to 6.5% from 3.82%.

Thrissur based South Indian Bank also increased interest rates on non resident external term deposits across maturities to 6.75% from 3.82%. The revised interest rates will be applicable to fresh deposits and on renewal of deposits.

Their peers like IndusInd Bank, Dhanalaxmi Bank and Laxmi Vilas Bank could follow suit. The Reserve Bank of India on December 16 had deregulated interest rates offered on non resident external rupee and ordinary non resident deposits to attract flows.

The deregulation of interest rates has triggered the move. The hike in interest rates would be applicable for deposits opened for a period of one year only,'' said P C John executive director, Federal Bank. The hiked rate is applicable until the year end. Currently, the bank's non resident Indian deposit base stands at about Rs10,000 crore.

Interest rate on non resident external deposit is tax free and the interest is fully repatriable unlike the non resident ordinary account. This would encourage depositors to park excess funds in these accounts,'' said John.

The hike in interest rates analyst say would not have any impact on banks net interest margin and cost of funds. Banks currently offer about 9.75% interest on non resident ordinary accounts which is taxed and has limitations on repatriation unlike the non resident external account.

The deregulation will enable banks to substitute these high cost deposit with low cost deposits,'' said a banking analyst with a domestic brokerage.

We expect to maintain our net interest margin in the range of 3.7% to 3.75%,'' added John from Federal Bank.

Source: EconomicTimes