India bank service extension

MINT reports that banks in India have started using third parties called 'correspondents' to take banking services to the unbanked. The technology involves a bank correspondent carrying a hand held device that can credit or debit a smart card held by the customer. Correspondents can disburse small loans, collect small deposits, sell micro insurance and mutual fund products. These distributors are paid mainly in the form of commissions on number of transactions done along with number of customers and business secured. Taken together with growing mobile banking, we may be seeing early signs of greater financial inclusion.

Be ready for the vegetable vendor who can now sell you carrots while conducting your banking business !

SBI lowers deposit rates: the opportunity is gone !

State Bank of India (SBI) has finally succumbed to competitive and margin pressures and lowered its interest rates on fixed deposits. It has lowered its peak interest rate on the 550 day deposit by 25 bp to 8.75% from 9 November. More importantly, it has withdrawn its super - saver term deposit scheme carrying a 9% interest rate for deposit maturity of 4 to 5 years and 8.5% for over 5 years.

Revised rates wef 7 November 2007 are:

15-45 days: 5.00%
46-270 days: 5.50%
271 days to less than 1 year: 6.75%
1 year to 549 days: 8.00%
550 days: 8.75%
551 days to less than 2 years: 8.00%
2 years to less than 3 years: 8.25%
3 years and up to 10 years: 8.50%.

This move shuts the door on the opportunity of leveraging lowering property (home loan) interest rates from HDFC while gaining from relatively high deposit interest rates from SBI. Good things don't last that long !

India property loan rates: ICICI, HDFC differ in views

ICICI Bank and HDFC appear to differ on the potential impact of higher CRR (Cash Reserve Ratio) on India property loan rates.

Reserve Bank of India (RBI) announced yesterday that banks will have to increase Cash Reserve Ratio (CRR) by 50 bp (0.5%), effective from Novermber 10. This means that banks will have to keep this additional percentage of their deposits as non-interest earning amount with the RBI. This is expected to further reduce the amount available for lending.

However, leading banks seem to differ on whether this CRR hike will lead to higher property loan rates. ICICI Bank Joint MD, Ms. Chanda Kochhar feels that this amount of CRR hike can be absorbed and there should be no need for an immediate increase in property loan interest rates. On the other hand, she also clarified that the current low rates offered are only for the Diwali festive period and can be expected to revert back to the pre-festive rates after the assigned period.

Mr. Deepak Parekh, Chairman, HDFC, on the other hand mentions that there is enough liquidity in the system and further lowering of property loan rates cannot be ruled out.

Meanwhile, some public sector banks have acknowledged that deposit interest rates will need to fall further for banks to maintain margins. Interestingly, State Bank of India (SBI) seems to continue wanting to acquire larger deposit market share through attractive deposit interest rates.

This difference highlights once again an interesting arbitrage opportunity: consider taking property loans from HDFC and putting deposits with SBI. As both these giants remain keen to preserve/gain market share in different parts of the retail banking business, you as the retail customer may be able to drive a hard bargain if you are in the market for these products.

Interesting opportunity - deposits vs home loans in India

There has been pressure in recent times for Indian banks to lower deposit rates. However, reports suggest that SBI is hesitant to do so as it seeks to continue to grow the deposit business. Therefore, one can still secure around 9% pa interest rates on deposits with SBI. Other banks are seeking to lower deposit interest rates but can't really do so if SBI maintains this position. On the other hand, HDFC is showing signs of lowering home loan rates.

This points to a potential to get best of both worlds by splitting your deposit and home loan relationships, if not done so already. Multi-bank relationships are quite normal and a customer should seek the best product features/deals in all major products - a bank should offer you significant additional value should it want to keep most of your relationship.