With the lowest deposit growth in half a century as a backdrop, banks want to avoid cutting deposit rates...
With the lowest deposit growth in half a century as a backdrop, banks want to avoid cutting deposit rates any further and risk losing incremental flows to government-sponsored schemes.
Deposits of the banking system grew 11.42% in 2014-15 to an outstanding R85.86 lakh crore, the lowest growth since 1961. The fact that credit growth was far lower at 8.6% prevented banks from facing liquidity crunch. Bankers said that, going forward, deposit growth will have to pick up once demand for credit starts increasing. In 2014-15, most public sector banks saw their deposits grow around 14% while private banks deposit growth was in the 8-22% band.
“We have reached an inflection point in deposit rates. Now, further reductions will depend on the recalibration of small savings rates,” said TM Bhasin, chairman of Indian Banks’ Association and MD& CEO of Indian Bank. Banks have cut deposit rates several times over the last one year, driven by reductions in the RBI’s repo rate. But such deposit rate cuts have been uneven across tenures.
The Indian Banks’ Association wants the government to cut interest rates on small savings scheme and the new Sukanya scheme that pays an interest rate as high as 9.2%.
“We met the authorities in the recent past and we requested that the rate of interest on small savings schemes of government like Sukanya Scheme or NSC, is at a level from where it should be brought down,” said Bhasin.
In the Union Budget for 2015-16, the government launched a new deposit scheme called Sukanya Samriddhi where individuals can deposit a minimum of R1,000 yearly as a guardian for a girl child. The scheme pays an interest of 9.2% and no withdrawals are allowed until the child reaches the age of 21.
“Banks have been realigning deposit rates to the market. But the rigidities of these schemes doesn’t let us further reduce the rates,” said Arun Kaul, CMD, UCO Bank. The various deposits offered under the existing small savings scheme pay 8.4-8.5% and the interest income enjoys tax benefits unlike bank deposits, the interest on which is taxable beyond a certain amount.
It is not the first time banks have felt their balance sheets threatened by small savings schemes. Before the RBI had freed the interest rate on savings account for banks in 2011, most bankers had said the ceiling of 3% on savings rate was robbing them of incremental flows as the small savings schemes gave a higher interest rate.
Following the freedom to set savings rate, lenders such as Kotak Mahindra Bank and YES Bank had hiked their rate to 5-6% to attract more savings deposits. Most other banks give 4% on their savings deposits ever since, which is on par with that of the postal savings deposits.