National banking bellwether State Bank of India raised interest rates on deposits for the first time in five years as it prepares to raise the lending game after the government strengthened it with capital investment and the trauma of bad loans eased. 

SBI follows private sector lender Axis Bank which raised deposit rates marginally last month in the first indication of rates hardening in the system as economic activity accelerates. 

Rates for customers with deposits of more than Rs 1 crore and senior citizens would go up between 50 and 140 basis points. A basis point is 0.01 percentage point. The rates rise the sharpest for the 46 days to 210 days bucket by 140 basis points to 6.25 per cent from 4.85 per cent. Many banks are now expected to follow the leader as liquidity conditions are also turning adverse and a surge in demand for loans, while deposit growth rate remains tepid due to stiff competition from mutual funds and insurance companies. 

"The need for higher deposit mobilisation and trend of increasing deposit rates are already visible in the bulk deposit segment, with the surge in volume of certificate of deposits outstanding as well as increase in minimum CD rates during last quarter," said Karthik Srinivasan, group head - financial sector rating, at rating company ICRA. 

The volume of bank certificate of deposits, which they use to borrow short-term funds, rose to Rs 1.52 lakh crore in January, from Rs 82,412 crore in September and the rates climbed to 6.23 per cent from 6.12 per cent. 

SBI said it would offer 6.25 per cent on bulk deposits for one year, up 100 basis points, with immediate effect; 5.25 per cent for deposits between seven days and 46 days, up 50 basis points, and 6.25 per cent for all deposits between 46 days and 2 years, and 6 per cent for deposits between two years and 10 years. 

The urgency to raise rates comes since banks in general are selling off their excess government bond holdings to lend as deposit rates are not matching up to demand. The incremental credit till January 5 was at Rs 2.02 lakh crore, far outpacing the additional deposits of Rs 1.27 lakh crore. Between September 29, 2017 and January 5, 2018, the incremental credit of Rs 1.85 lakh crore was significantly higher than the accretion of deposits of Rs 0.30 lakh crore. 

This unevenness in the demand for loans and accretion of deposits led to banks selling off their bond portfolio. 

The credit deposit ratio has increased to 74.6 per cent as on January 5, 2018, from the lows of 68.5 per cent in December 2016 and 73 per cent each at end of fiscal 2017. #casansaar (Source - Economic Times)