Why the rich are withdrawing term deposits

The banking community is a worried lot these days as high net-worth individuals (HNIs) have started withdrawing term deposits. Bulk of the money is going to small savings and other instruments which offer higher returns than bank deposits.

Funds are also flowing into the equity markets directly as well as through the mutual fund route.

"Typically those who were keeping Rs 500,000 worth of bank deposits have withdrawn Rs 450,000 from the bank and kept only Rs 50,000 for any sudden requirement of funds. Our loss is the gain of post office schemes and the stock market," said a senior executive with a large public sector bank.

Assets under management (AUM) of the mutual fund industry has swelled by over Rs 46,000 crore (Rs 460 billion) since the beginning of the financial year -- from Rs 1,49,388 crore (Rs 1,493.88 billion) to Rs 1,95,730 crore (Rs 1,957.30 billion).

The rise in AUM is, however, on account of a combination of the rise in market value of stocks as well as fresh inflows.

"It's difficult to check the outflow as interest earned on bank deposits is fully taxable. Why would people keep long-term deposits with banks to earn 5.5-6 per cent taxable interest income while post office recurring deposits pay 7.5 per cent?" asked a bank chairman.

With individual deposit holders withdrawing, there is a rush to woo educational institutions, trusts and corporations to park money with banks.

"We need to pay them 1 per cent over above the rack rate. Bulk of this money is not long term as it stays with us for six months to one year," pointed out another banker.

As a result of this, banks' liability in this maturity bracket is increasing while most of the assets are built for a longer term. This is creating an asset-liability mismatch for most banks.

For instance, the State Bank of India, the country's largest commercial banks, had Rs 55,760 crore (Rs 557.60 billion) worth of deposits in the six months to one year bracket as on March 31, 2005. Its assets in this time bracket were only Rs 6,136 crore (Rs 61.36 billion).

Between three and five years, the SBI had Rs 1,81,153 crore (Rs 1,811.53 billion) worth of assets but there was Rs 80,550 crore (Rs 805.50 billion) deposits in this time basket.