The finance ministry has directed the Reserve Bank of India (RBI) to take measures to curb the participation of banks in the bidding of bulk deposits by cash-rich public sector undertakings. The move, a first of its kind, is aimed at keeping the cost of credit low, which the finance ministry feels is hiked due to such aggressive bidding by banks.

According to a report in The Economic Times, PSUs, which have cash balances of about Rs 3 lakh crore, often get a higher rate for these deposits due to a bidding process which is done informally.

The apex bank has been trying to deal with this problem for some time now. Also, in its 2012-13 monetary policy it had highlighted that there existed a huge disparity between the banks’ retail and bulk deposits which gave an unfair advantage to bulk depositors.

Earlier, bulk deposits of Rs 15 lakh and above attracted higher interest rates compared to retail deposits having the same maturity. The apex bank had however, increased this limit to Rs 1 crore in April. In addition, banks are required to maintain a “minimal” difference in interest rates offered to term and retail deposits but what constitutes “minimal” remains ambiguous.

“At present the onus is on the bank's board to approve a transparent policy on pricing of liabilities but business matters force banks to overlook such norms,” a finance ministry official told the paper. The official added that once “minimal” is defined, then banks will not have an option but to offer the rates within the specified range.

Meanwhile, an official from the department of public enterprises (DPE) said that they have already taken the necessary steps to discourage PSUs from inviting bids for their deposits.

PSUs, on the other hand, feel that targeting them is unfair as private companies, which also deposit their cash balances with banks for shorter durations, get high interests. Banks have however, maintained that the move will encourage PSUs to undertake capital expenditures instead of only relying on idol cash deposited in banks for higher profits.