MUMBAI: Borrowing a leaf from their larger peers who have been wooing depositors with attractive pricing for medium-term fixed deposits of up to 7.30% return per annum, several mid-tier banks are now doing the same offering as much as 8.50% at the peak and over average 20-30 bps more than the larger banks.
Mid-sized banks, which have launched special deposit drive include RBL Bank, Bank of Maharashtra, Federal Bank, Bandhan Bank, and Tamilnad Mercantile Bank among others to increase in deposits.
Continuing slower growth of deposit mobilisation for more than two months had the regulator Reserve Bank and even the North Block mandarins getting worried about asset liability mismatch. People were pulling out money from banks and parking them in equities and mutual funds and even derivatives since the pandemic-induced crash in March 2020 and the subsequent recovery from June of that year. Since then the stock market and mutual funds have been giving much higher returns on their money.
While credit growth has been averaging 15-16% system-wide, deposits accretion has been far lower averaging at 11-12% for the past few years. In FY24, credit growth was at 19.3% and deposit growth was 14.7%, forcing banks to offer higher prices for term deposits.
Kochi-based Federal Bank has unveiled a limited period fixed deposit scheme offering 7.35% for a 400-day money, 7.40% for 777 days, and 50-month tenor for callable deposits. It is offering an additional 0.50% to senior citizens. If you put in non-callable deposits above Rs 1 crore, it is offering 7.50% for 400 days; 7.55% for a 777 day money.
RBL Bank is offering 8.10% for 500-day money and 8.60% for senior citizens. Pune-based Bank of Maharashtra is offering 7.25% for 777 days tenor in a limited period offer. Turticorin-based Tamilnad Mercantile Bank is offering 7.50% on fixed deposits for 400-day tenor and 8% for senior citizens.
In June and July large lenders like State Bank, 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.
Some of these large banks, in the meanwhile have also hiked their lending rates as well to protect their margins, which analysts war will fall by 25-30% this fiscal as deposit pricing keep on rising.
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.
Typically banks earn more when their interest expense, which is what they pay for their funds is lower. In a normal scenario, banks price deposits/liabilities lower than their assets/loans to protect their margins/spreads.
In the current scenario, banks are forced to raise domestic deposits at higher prices, because even raising money from outside is no longer lucrative as the interest 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%.
In contrast, if the Reserve Bank cuts repo rate it would trigger faster repricing of loans downwards as over 40% of advances are linked to an external benchmark, primarily the repo rate. Together, these factors indicate a compression in net interest margin (NIM) in fiscal 2025 and transmission on the assets and liabilities sides will continue into fiscal 2026, the agency said.