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Its war time for FIs - Views on News from Equitymaster
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  • Jun 20, 2000

    Its war time for FIs

    All is fair in love and war. Most financial institutions (FIs) seem to be following this adage to the hilt. However, it's war like situation for now. Taking a cue from the credit policy announcement on relaxation of guideline on short-term resources raising by FIs, most institutions have embarked on a massive marketing drive to promote their short-term instruments ala fixed deposits.

    The move is expected to serve as a boon for the short-term risk averse investors as they will get a few more options to park their money at competitive rates. For banks and FIs, the rate war has begun.

    HDFC is currently in the market with a monthly income deposit plan, offering 10% per annum for a maturity profile of 5 years, wherein interest will be paid monthly. It is also offering 10.5% per annum on annual income plan for a similar maturity period. Crisil and Icra, the two topmost rating firms in the country have assigned `AAA' rating to both the plans of HDFC. The institution is also offering other short term products like deposits with cumulative and non-cumulative option, double money option and easy way savings plan. Minimum amount that can be deposited under both the plans is Rs 20,000.

    IDBI is also in the market with it fixed deposit product. On a 36 to 60 month deposit, it is offering a rate of 9.5%, 8.5% for 24 months to 35 months and 8% for 13 months to 23 months.

    ICICI is all set to enter the market with a competitive rate shortly. Currently the institution is finalising its term deposit-raising plan. At present, ICICI raises term deposits under two schemes - ICICI Cumulative Deposit and ICICI Regular Income Deposit - for a tenor ranging between 12 and 60 months. At present, ICICI raises term deposits under two schemes - ICICI Cumulative Deposit and ICICI Regular Income Deposit - for a tenor ranging between 12 and 60 months. The interest rate is 9 per cent for a 12-month deposit and 10.50 per cent for 60 months

    In the April credit policy, the FIs were given freedom to decide interest rates on short-term instruments. "It has been decided that FIs may be given flexibility in the matter of fixing interest rates on term deposits. This will facilitate FIs using these instruments in a flexible manner for asset liability management (ALM)," stated the credit policy document issued in April this year. Earlier the interest rate on term deposits offered by FIs was subject to either the ceiling of 14 per cent per annum or linked to rate offered by State Bank of India (SBI) for comparable maturities.

    At present, banks offer more or less similar rates of interest on term deposits as FIs, but are faring much better on account of a large branch network as compared to those of institutions. State Bank offers an interest rate of 9 per cent for one-year deposits, and 10.5 per cent for five years, which is similar to the rates offered by FIs. However, it doesn't make much sense shifting portfolio right away to FIs, as rates offered by them are in line with the bank rates.



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