As credit growth continue to outpace deposit growth, banks raise FD rates

Post pandemic, as economic recovery gathered pace, demand for loans increased


The last couple of weeks have brought good news for savers as several public as well as private sector lenders have raised their interest rates on term deposits. Savers are likely to enjoy high interest rates on fixed deposits for some more time, as banking sector liquidity remains tight and credit growth continues to outpace deposits growth.

The country's largest lender, State Bank of India (SBI), last week, raised interest rates on some FDs by up to 50 basis points. For instance, interest on deposits maturing between seven days and 45 days was raised to 3.50 per cent from 3.0 per cent. For deposits maturing between three years to less than five years, the rate was raised to 6.75 per cent from 6.50 per cent. Several other lenders, including Kotak Mahindra Bank, Bank of Baroda and Axis Bank among others, have revised their FD rates in recent days.

The highest interest rate depositors can earn at Axis Bank is 7.10 per cent. At Bank of Baroda, the highest interest rate the lender is paying is 7.40 per cent and at Kotak Bank it is 7.45 per cent. SBI is offering an interest of 7.0 per cent for FDs of two years to less than three years. Do note that these rates are for deposits less than Rs 2 crore and for regular customers. Across most banks, senior citizens are paid a higher rate of interest on their deposits. Usually, FD rates for senior citizens are around 50 basis points higher.

The Reserve Bank of India raised its benchmark repo rate from 4.0 per cent to 6.50 per cent in the 2022-23 financial year. But, for the last five consecutive monetary policy committee meetings, this rate, at which the central bank lends money to commercial banks, has been left unchanged. Yet, banks have raised their deposit rates from time to time. Why is that so?

Well, three things are in play here. Post pandemic, as economic recovery gathered pace, demand for loans increased, from corpoprates, but more so from retail customers. Therefore credit growth has been robust.

As of December 1, 2023, for instance, banking sector's credit growth was at 16.2 per cent year-on-year. This excludes the impact of the merger of mortgage lender HDFC with HDFC Bank. If the merger is included, then the banking sector credit grew 20.6 per cent according to a recent report by India Ratings and Research.

Deposits are an easy source for banks to mobilise funds, which can then be used to lend. Deposit growth has also been good for banks, but hasn't kept pace with credit growth. For instance, till December, the deposits had grown 12.9 per cent year-on-year. That has further increased to around 13.3 per cent in the fortnight that ended December 15. However, the gap between deposit and credit growth remains.

Given the strong credit growth, there is intense competition among lenders to grab a larger share of the deposit pie. At the same system, liquidity too has been tight, with the Reserve Bank of India focused on "withdrawal of accommodation."

"Even while year-on-year deposit growth has improved, the gap with credit growth continues. This is likely to keep competitive intensity high for accrual of deposits among banks in the near-term," said Karan Gupta, director and head of financial institutions, India Ratings.

Therefore, banks have raised interest rates on FDs to make them more attractive and hope more people will park their money in fixed deposits.

With the RBI recently tightening norms on unsecured lending, and credit demand in the agriculture sector likely to be weaker, there is expected to be some slowdown in credit growth rate, although it will still remain healthy.

Credit ratings agency ICRA expects credit growth of 12-13 per cent in the 2024-25 financial year, driven by strong demand in the services and retail segment. Therefore, the deposit base will continue to be repriced upwards, it says.

RBI has already raised concerns over the relatively slower deposit growth, including higher share of bulk deposits, and has nudged banks to reduce their higher credit-deposit ratio. System C/D ratio is at 79 per cent, with some lenders, especially private and a few small finance banks, running C/D ratio upwards of 90 per cent, according to analysts at Emkay Global Financial Services.

Therefore, unless credit growth rates come off sharply, lenders will continue offering attractive rates on term deposits over the next few months, at least.


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