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Part - VII

Already, there has been a trend, in a number of banks in India, of not accepting deposits below Rs. 1 lakh or Rs. 10,000 since the cost of maintaining such an account far exceeds the yield from the deployment of that deposit.

Rate of Interest on Deposits?

Presently, banks are offering same rate of interest to various depositors, mainly on the basis of the period for which the deposit is kept. In future, banks may offer differential rates of interest to two depositors's who have kept deposit for the same period. The differential could be on the amount of deposit, the rating of depositor. The depositors would be rated on the basis of the length of association, total deposits in various schemes of the Bank and related entities, facilities enjoyed and promptness of repayment.

Rate of Interest on Advances?

Banks are now free to charge their own rates of interest on the advances granted to various customers. Presently, for advances over Rs. 2 lakhs, Banks are charging interest on the basis of Credit Risk rating of the customer and it is determined with reference to the Prime Lending Rate (PLR) of the Bank. It has been observed that there has been a large scale lending, in the recent times, which are lent at sub PLR. In view of this, Indian Banks Association has issued instructions to all the Banks to work out a Benchmark PLR based on their cost structures and not to follow some bank (who might be the leader?) in fixing their own PLR.

In future, the rate of interest on advances would be based not only on the risk rating of the customer but also on the cost of capital to be provided for that account, which again would be based on the risk profile of the customer. The concept of 'Economic Capital' would gain importance, in the future. Economic Capital is the capital that would give optimum profit to the Bank considering the risk profile of the customer as well.

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* Contributed by -
Aditya Khemani, PGDM - II Year,
Tuhina Singh, PGDM - I Year,
IIM Lucknow.