SBI wants a share of mutual funds' pie

State Bank of India’s move to launch fixed deposits with a maturity of just three days is likely to lure away part of the surplus cash of corporates that usually ended up with mutual funds. The country’s biggest bank has not yet revealed the interest rate it would offer on these ultra-short FDs but some expect it to be in the range of 4-4.5%.  SBI had earlier launched fixed deposits of seven days that fetched a return of 7.5% per annum and immediately collected around Rs 30000 crore.

Companies normally prefer liquid funds to park excess cash because they are tax efficient and there are no exit costs. Liquid funds are debt funds which invest in practically zero-risk government securities.  Current investment in liquid funds below one-month tenures is around Rs 1.61 lakh crore, three-fourths of which is corporate money. SBI now plans to target very short term money with its new product. On December 2012, the bank had total deposits of Rs 11.56 lakh crore, 16% more than the previous year.  Short term FDs could be a good instrument for the bank as it could help its reserve liquidity management.

Liquidity in the banking system is often tight and government borrowing is on the rise. The central government alone is expected to borrow Rs 6.29 lakh crore in 2013-14 compared to Rs 5.8 lakh crore in the last fiscal year. Banks would need to mobilize more deposits to fund the huge borrowing programme. Term deposits have better float (money that the bank can invest) than current accounts and the money can be invested in government securities or the call money market, earning the bank a neat profit.

“I think the three-day fixed deposit, when launched, will be a huge competition to the liquid fund industry and, going by the success we had with the seven-day product, we are very confident about this move,” says Krishnakumar, managing director, SBI.

Opinion is divided among corporate investors on why they may opt for an FD that would get them lower returns than liquid funds. A trader at one of India’s largest corporate treasuries says many companies keep funds in SBI’s FD products to keep the behemoth happy. He says it is merely to maintain a good relationship with the bank which would be lending to practically every major company in the country.

A senior official from a PSU oil marketing company had a different opinion. “We prefer the seven-day FDs as compared to a liquid fund because we think that the FDs are safer as there is no volatility of returns,” he says. He feels that the three-day FD is a product that he would look forward to for investing his short-term surplus.

“Three-day FDs are more liquid compared to seven-day FDs. However, liquid funds provide liquidity of one day. Barring few funds, there are no exit loads on liquid funds. Hence assuming yields to be the same, dividend option of liquid funds would continue to be better for corporates,” says Mukesh Agarwal, President, CRISIL Research.

Liquid funds fetch around 9 per cent annualized for a seven-day period as compared to 7 days FD which return 7.5%.  Corporates have invested in the fixed deposit because these have zero risk weightage.  While short-term capital gains from liquid funds (growth option) and interest earnings from FDs are taxed at the same rate of 33.99%, most corporate investors prefer the dividends option of liquid funds owing to the lower effective tax rate of 25.37%. But the mutual fund industry fears the FDs will take away at least some money that would have otherwise come to it.

The thoughts and opinions shared here are of the author.