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Poornima Mohandas

MUMBAI, June 4

FLOATING interest rates may be the name of the game as far as home loans go, but when it comes to bank deposits the Indian investor is not prepared to keep his returns afloat.

A RBI-commissioned working group recently examined the issue and suggested that some of the advantages that come with a fixed deposit would have to be taken away to make floating deposits `attractive'.

The problem was not so much with the variable returns that the customer would get, said the former Joint Managing Director, ICICI Bank, Mr H.N. Sinor, who heads the RBI working group.

"It is more to do with the fact that fixed deposits in the country have all the merits of a floating deposit scheme, therefore, floating deposits are not popular," he said.

"Unless fixed deposits are made truly `fixed' with a lock-in period and stiff penalties given on withdrawal before maturity, floating deposits are not likely to become popular," said Mr Sinor.

The total banking industry would have merely Rs 25-30 crore worth of floating deposits with each bank having collected as little as Rs 20-50 lakh, he said. This was a guesstimate arrived at, following a meeting with various banks on the issue, said Mr Sinor.

Said Mr Amitabh Chaturvedi, General Manager, Head-Retail Channels & Liabilities Group, ICICI Bank, "We started our floating deposit rate scheme in July 2002, almost 10 months down the road, the scheme has not seen much volumes."

"Only some high net worth individuals with excessive money to spare have shown some interest in floating deposit schemes. This too is in very small volumes," said Mr Chaturvedi.

The RBI in its mid-term review of the Monetary and Credit policy, October 2002 encouraged banks to "popularise flexible deposit schemes among the depositors as this is in the long-term interest of banks as well as depositors".

Fixed deposits often lead to unhealthy high-cost deposits for banks, especially, in a softening interest rate regime as is the case now. This severely constrains a bank's ability to lend at competitively low rates. Substantial portion of bank deposits remain in the form of long-term deposits at fixed interests rates and, therefore, the average cost of deposits remain as high as 6.25 to 7.25 per cent.

The psyche of the Indian investor is not, however, averse to variable returns, going by the way the mutual fund industry has caught his fancy.

"It is a possibility that floating rate deposits may become popular when interest rates bottom out, and the only way for interest rates is northwards," said the retail head of a private bank. However, there are mixed views on the same.

Said another bank official, the bottoming of interest rates was a subjective thing and most often than not the common man lacked perspective on interest rates to gauge what would work in his favour.

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