Although banks and other lenders have raised interest rates on deposits over the past few months, the increasing demand for loans and tighter liquidity could see them rising by at least 50-75 bps.
Rajiv Lochan, managing director, Sundaram Finance, believes both banks and non-banks will inevitably have to push up deposit rates.
“Top-rated players like us who are offering 7.3% for three–year money may have to move up levels of 7.9% or maybe even 8%,” Lochan said.
HDFC is offering 7.5% for 45 months for its Sapphire Deposits and those lenders which don’t boast of a rating of AAA would need to offer a little more. Banks, on their part, had been holding back, either using the excess liquidity on their balance sheets or their excess SLR (statutory liquidity ratio) securities.
Between June and October, State Bank of India (SBI) upped rates in the 2-3 year basket from 5.35% in June to 6.25%. However, over the past week, some state-owned banks have announced rates of 7.4% on special deposit schemes.
A Balasubramanian, MD & CEO, Aditya Birla Sunlife AMC, observed that with the terminal repo rate is expected to settle at around 6-6.25%, money is bound to become costlier. “If the demand for credit sustains, there will be stiff competition for deposits,” he said.
According to analysts at HSBC, if the current loan-deposit ratio (LDR) is to be maintained, the growth in deposits over FY22-25 would need to be of the order of 16-20% compounded annually.
“Deposit rates need to rise by 100-150 bps to make deposits attractive as a product and accelerate growth,” Abhishek Murarka wrote recently. The LDR for private banks is 82-91% while for state-owned banks, it is slightly lower.
Lakshmi Iyer, CEO, Kotak Investment Advisors, expects the terminal repo rate to move to 6.25-6.5% which would see rates going up by at least 50 bps.
“Mortgage rates are already 8% and liquidity is tight. Since they cannot run ALM mismatches, both banks and non-banks would need to mobilise liabilities in line with the tenure of the assets,” Iyer said.
Over the past six to eight months, the demand for credit has shifted to banks as seen in the growth in non-bank non-food credit of 17.2% y-o-y, as of October 7. Compared to this, the increase in gross systemic credit- comprising CPs, ECBs and corporate bonds – was only 14.5% y-o-y.
If banks are somewhat cautious about hiking deposit rates, it is because a sharp hike in loan rates could slow discretionary spending and curb demand for credit. Moreover, a further softening of commodity prices may lower the working capital needs of companies, unless production levels are increased. Analysts have also drawn attention to the fact that private capex is unlikely to gain too much momentum in the near term.
As Sanjiv Chadha, MD&CEO, Bank of Baroda, observed, given the base effect, it may not be fair to extrapolate the growth we have seen in Q1 and Q2, especially in retail loans. “However, there is good demand from corporate,” Chadha said.