Banks are in a frenzy, raising deposit rates in December amidst a cash crunch. Discover why giants like SBI and BoB are offering higher interests and what it signals about our economy’s liquidity woes.
In December, key banks raised their term deposit interest rates to attract customers with excess funds, responding to a liquidity shortage caused by tax payments and sluggish government expenditures.
Leading banks, such as the State Bank of India (SBI) and Bank of Baroda (BoB), bumped up fixed deposit interest by 25-50 basis points (bps) for SBI and 10-125 bps for BoB, across different periods, on December 27 and 29 respectively. One basis point equals 0.01 percent.
The drive to elevate deposit rates stems from a persisting liquidity deficit in the banking system, which has been present since mid-September, with intermittent days of surplus. Data from Bloomberg indicated that on December 21, the shortfall escalated to ₹2.6 trillion – the most substantial gap in 2023.
Analysts anticipate that liquidity will rebound as the government escalates its spending. Kotak Institutional Equities remarked on December 26 that the government is well-positioned to increase its expenditures in the quarter from January to March and might reduce its cash balance in the upcoming months.
Between May 2022 and November 2023, the RBI data reveals that the mean deposit rate on new deposits surged by 213 bps.
Bank executives are focusing their attention on analyzing and managing assets and liabilities, with committees discussing which duration brackets necessitate additional funding.
“The decision on availability of funds for certain deposit durations falls with the asset-liability management committee. A scrutiny of our deposit maturity profiles helps us identify potential or expected gaps upon maturity,” a bank representative explained, referring to the hike in deposit rates during December.
“This indicates that we can expect further adjustments in rates across various durations,” he added, requesting confidentiality.
Some interpret these rises as a direct consequence of the liquidity shortage.
Facing a notable liquidity shortfall, where banks are now relying heavily on the RBI’s short-term funding of nearly ₹3 trillion through the Marginal Standing Facility (MSF) and Variable Rate Repo (VRR) at rates of 6.7-6.75%, there’s been a marked increase in deposit rates, most prominently for maturities of up to six months, explains Anil Gupta, Icra’s Financial Sector Ratings’ Senior Vice-President and Co-Group Head.
Gupta predicts a more conservative rise in deposit rates for longer-term deposits, capped at 20 basis points, as banks steer clear of costly long-term deposits amidst the possibility of interest rate reductions in the coming year.
With expectations of the RBI commencing rate cuts from 2024, especially after sustaining the repo rate at 6.5% for five consecutive policy meetings since May 2022, it’s been a period of watchful stability post a cumulative 250 basis point increase from the previous year to February 2023.
Gupta further elaborates that, although deposit rates are climbing, leading to a higher repriced deposit base, the lending yield uptick will likely be confined to loans pegged to the Marginal Cost of Funds Based Lending Rate (MCLR), the bank’s inherent benchmark, since loans tied to the repo rate won’t mirror these elevated benchmarks.
Industry analysts have recognized that, despite a bridge in the gap between credit and deposit growth rates, with credit still prevailing over deposits, banks are keen on lifting rates to entice depositors.
Crisil Ratings anticipates the deposit rate surge to persist. While predicting a deceleration in credit growth compared to FY23, expectations for overall robust growth still span into FY25. This sustained trend might, however, compress net interest margins (NIMs) attributable to the rising costs of deposit funding.
The pinnacle of NIMs for banks has likely been reached, states Subha Sri Narayanan, Director at Crisil Ratings.
Narayanan implies that the recent surge in deposit rates will not only influence new deposits but also those set for renewal, which typically constitutes 30-35% of deposits annually, inflating overall deposit expenses. Given most asset repricing has occurred, this could dent NIMs by about 10-20 basis points. Nevertheless, he suggests that, sector-wide profitability should be buoyed by low credit costs continuing to counterbalance these effects.
