Banks not in a hurry to hike interest rates on deposits despite price rise

With abundant liquidity and tepid credit demand amid lockdowns, banks are not in a hurry to hike interest rates on deposits despite the price rise. The crucial factor will be the government’s decision on small savings instruments (SSIs) by the end of the month for any revision, especially by public sector banks.

In April, rates on SSIs were slashed by 50-100 basis points for the first quarter (Q1Fy22) but the government rolled back the decision amid the Assembly elections in four states.

A S Rajeev, MD and CEO, Bank of Maharashtra, said the bank had seen 4-5 per cent growth in savings deposits during Q1 because it seemed people preferred to save during the pandemic (April onwards). Credit growth needs to happen in a substantial way in the second quarter for banks to think about hiking rates, he said.

Year-on-year growth in deposits till early June 2021 has been 9.7 per cent while credit growth is only 5.7 per cent. Around the same time last year, deposits had expanded by 11.3 per cent and credit expanded by 6.2 per cent, according to the Reserve Bank of India data. With a severe contraction in demand due to lockdown to contain the pandemic, the credit\deposit ratio (C\D ratio) fell sharply through FY21 from a high of 76 per cent in March 2020 to 71.5 per cent in March 2021. This perhaps signals there is still room for banks to accommodate any rise in credit demand before they raise deposit rates to garner money.

The first priority of banks could be to increase lending rates and then look to revise those for deposits, bankers said. According to the RBI’s bulletin (June 2021) during March 2020 to May 2021, the median-term deposit rate, representing average card rates on fresh deposits across all tenors, declined by 144 basis points (bps). There was a noticeable moderation stemming from shorter-tenor deposits of a maturity of up to one year (156 bps). Across bank groups, the maximum cut in term deposit rates was by foreign banks, followed by private banks. PSBs, which face stiff competition from alternative savings instruments like small savings, allowed more moderate transmission to term deposit rates, the RBI said. 

Given the tepid demand for money, banks are parking funds with the RBI’s liquidity window at 3.35 per cent while the average cost of funds is 4-5 per cent. This leads to negative carry, meaning banks incur losses when deploying money.

A top bank executive with a Mumbai-based public sector bank said banks were commercial organisations which must look to earn margins. Plus, the risk of a rise in credit costs is also around. This practically rules out the option of increasing deposit rates in the near future.