Taking a cue from their larger counterparts who have been wooing depositors with attractive pricing of medium-term fixed deposits of up to 7.30 percent return per annum, several mid-tier banks are now offering as much as 8.50 percent at the peak and an average 20-30 basis points (bps) more than the bigger rivals, to attract deposits.
Mid-sized banks that have launched this special deposit drive include RBL Bank, Bank of Maharashtra, Federal Bank, Bandhan Bank, and Tamilnad Mercantile Bank, among others.
It can be noted that the continuing slower growth of deposit mobilisation for more than two months had the banking regulator Reserve Bank of India and even the Finance Ministry getting worried about asset liability mismatch.
Since the pandemic-induced crash in March 2020 and the subsequent recovery beginning in June of that year, people have been withdrawing money from banks and investing it in equities, mutual funds, and even derivatives. The stock market and mutual funds have since provided significantly higher returns on investments.
While credit growth has been averaging 15-16 percent system-wide, deposits accretion has been far lower averaging at 11-12 percent for the past few years. In FY24, credit growth printed in at 19.3 percent, while deposit growth was only 14.7 percent, forcing banks to offer higher prices for term deposits.
The Kochi-based Federal Bank has unveiled a limited period special fixed deposit scheme offering 7.35 percent interest for a 400-day plan, 7.40 percent for 777 days, and 50-month tenor for callable deposits. It is also offering an additional 0.50 percent to senior citizens. If you put in non-callable deposits above Rs 1 crore, it is offering 7.50 percent for 400 days; 7.55 percent for a 777 day plan.
Mumbai-based RBL Bank is offering 8.10 percent for 500-day money and 8.60 percent for senior citizens.
While the Pune-based state-run Bank of Maharashtra offers 7.25 percent for a 777 days tenor in a limited period offer, Tamilnad Mercantile Bank , the Turticorin-headquartered mid-size bank, is offering 7.50 percent on fixed deposits for 400-day tenor and 8 percent for senior citizens.
In June and July large lenders like the State Bank of India, HDFC Bank, Bank of Baroda, Union Bank of India, Canara Bank, Bank of India, Central Bank of India and Punjab National Bank among others launched special fixed deposit schemes to mobilise deposits at a faster pace to support credit growth in the system.
Some of these large banks, in the meanwhile have also hiked their lending rates as well to protect their margins.
The banks which have increased their loan pricing -- so far only MCLR-based loans which are typically short term corporate loans -- include SBI which earlier this week upped the MCLR loan rate by 10 bps across tenors, Bank of Baroda, Canara Bank, and Uco Bank had also hiked their MCLR based loans by 5 bps.
And typically, banks earn more when their interest expense that they pay for their funds is lower. In the normal scenario, banks price deposits/liabilities lower than their assets/loans to protect their margins/spreads.
But currently, banks are forced not to up lending rates given that it is already high. At the same time, they are forced to raise domestic deposits at higher prices, because even raising money from outside is no longer lucrative as the interest rate in the overseas markets are also at decadal high.
According to rating agency Crisil, banks' profitability is set to moderate due to higher cost of deposits given the continued re-pricing at elevated rates. Deposit costs are expected to increase 25-30 bps this fiscal after having risen 140 bps since the start of the rate tightening cycle in May 2022. As a result, net interest margin (NIM) is likely to compress 10-20 bps this fiscal to 3-3.1 percent.
In contrast, if the RBI cuts repo rate it would trigger faster repricing of loans downwards as over 40 percent of advances are linked to an external benchmark, primarily the repo rate. Together, these factors indicate a compression in NIM in fiscal 2025 and transmission on the assets and liabilities sides will continue into fiscal 2026, the agency said.