Even as the Reserve Bank of India has paused its rate-hiking cycle in April, bankers say there is still room for deposit rates to go higher.
“We have to take care of depositor interest also. Keeping that in mind, in some of the buckets of term deposits, we have raised the interest rate in the last six months or so, and I think that will be our strategy going forward also,” State Bank of India (SBI) chairman Dinesh Kumar Khara said in a post-earnings call on Thursday.
Banks may further hike interest rates on fixed deposits to meet the demand for credit, at a time when systemic liquidity has considerably eased. However, the quantum of the hike is expected to be minimal as the repo rate hike cycle is near its peak, bankers said.
The weighted average domestic term deposit rate on fresh rupee term deposits rose 23 bps to 6.48% in March 2023 from 6.25% in February 2023.
The same on outstanding rupee term deposits increased 14 bps to 6.16% in March 2023 from 6.02% in February 2023. Overall, on a month-on-month basis, outstanding deposit rates for public sector banks, private banks, and scheduled commercial banks rose 18 bps, 17 bps, and 23 bps, respectively.
This rise in deposit rates has been aided by a renewed focus among banks to raise deposits when the Reserve Bank of India (RBI) has been trying to remove excess liquidity from the financial system. The rush for deposits has also been driven by the fact that the deposit growth has consistently trailed the loan growth. Credit offtake rose nearly 16% YoY for the fortnight ended April 21, the latest RBI data showed. On the other hand, deposits grew a mere 10.2%. Further, the credit-to-deposit ratio rose to 75.7% as of April 21 from 75% in the previous fortnight.
“I think we still have some room for deposit rates to rise. This fiscal, we expect the underlying fundamental drivers for credit to remain strong. So a 10% Y-o-Y deposit growth will not be sufficient to meet a 15% growth in credit,” says Krishnan Sitaraman, senior director and deputy chief ratings officer at Crisil. Sitaraman contends that a deposit growth of 12% would be sufficient to meet the expected credit growth of 15% in 2023-24.
Deposit rates continue to be lower than their pre-pandemic levels (as of March 2020) by around 20 bps. Hence, banks have some distance to cover before the deposit rates reach the repo rate or even their pre-pandemic levels.
“The deposit rate hike is linked more to the demand-supply gap. Any institution that is in need of higher liabilities may play around with a higher deposit rate…,” said Virat Diwanji, group president and head – consumer bank, Kotak Mahindra Bank. “Obviously, CASA is the preferred route, but if the gap between savings account rate and term deposit rate is wide, customers are likely to move to the latter.”
With credit demand sustaining, IDBI Bank deputy managing director Suresh Khatanhar believes that banks will also look to raise money through bulk deposits and certificates of deposits. On the flip side, the cost of funds of banks is expected to rise going ahead as the repricing of deposits occurs with a lag. This would also lead to a compression in their net interest margins (NIM).
“If you ask me whether all of the deposit increase has already fully come in, I would say no, not yet. It will come. It is simply a function of, as the book starts to reprice, the lag effect, it comes in,” Srinivasan Vaidyanathan, chief financial officer, HDFC Bank, said in the post-earnings call.
“With the current deposit mix, the cost of funds will start to inch up as the 30% growth that we have had in time deposits in the recent quarter starts to fully come in. So, the cost of funds will go up only because of the mix of deposits, not because of the rates,” he added. Broadly, the NIM of banks is expected to fall by up to 25 bps in the current financial year as deposits get repriced. However, experts note that overall profitability will remain steady as the asset quality has improved.