Banks are shedding costly bulk deposits to protect their net interest margins (NIMs) ahead of expected interest rate cuts. They are now focusing on increasing the share of retail deposits with the aim to reduce their cost of funding amid tight liquidity conditions.
“We will be mindful of how to contain bulk deposits…we are not going to go for bulk deposits or the certificate of deposits,” Ashok Chandra, MD & CEO, Punjab National Bank, said after announcing the bank’s third-quarter earnings. “We want to cut down on bulk deposits because it will also help (us) protect NIMs,” he said.
Bulk deposits carry higher interest rates, increasing the bank’s cost of funds. In an environment where interest rates are expected to decline, banks may struggle to earn higher returns on loans, creating pressure on NIM, which is the difference between interest earned on loans and interest paid on deposits. For banks, the benefit of lower cost comes with a lag as assets get re-priced quicker than liabilities. Reducing high-cost bulk deposits allows banks to maintain a healthier spread between what they earn and what they pay.
“In this quarter (October-December) our wholesale deposits and deposits from financial entities came down by Rs 4,000-5,000 crore and in spite of that we have managed 11% growth in deposits year-on-year,” said Harsh Dugar, executive director, Federal Bank. “There are two reasons behind this decision — one is cost and the second is liquidity,” he said.
Bulk deposits tend to be less stable and more volatile. They can be withdrawn quickly, posing liquidity challenges during periods of market stress or economic uncertainty. On the contrary, retail depositors are less likely to move funds frequently, providing a stable funding base. This predictability helps banks plan lending and investment without worrying about sudden withdrawals.
The credit-to-deposit ratio remained elevated at around 80% at the end of January. While credit growth has moderated, term deposits are rising faster, driving up the cost of funds.
Fixed deposits of banks have increased by nearly 10% to Rs 134.2 lakh crore as on December 2024 from Rs 122.6 lakh crore as on December 2023, according to RBI data. Total deposits have grown by 5.6% to Rs 217.7 lakh crore as of December 2024 from Rs 206 lakh crore as of March 2024.
With the Reserve Bank of India (RBI) expected to cut the repo rate by 50- 75 basis points in the next financial year, experts say that declining rate trajectory could further strain NIMs of banks.
“Lending rates may continue to face downward pressure, potentially leading to a slight decline in NIMs for banks in the upcoming quarters,” said Sanjay Agarwal, senior director, Care Ratings. “However, the rising cost of funds, driven by ongoing re-pricing and select banks increasing tenures to attract deposits and sustain credit growth, is exerting additional pressure on NIMs,” he added.