A lack of awareness and reticence from risk-averse customers is the main reason why lenders have not been able to generate any significant momentum for the floating rate fixed deposits, according to experts. Consequently, Yes Bank and IDBI Bank, the only players which are currently offering these products, haven’t seen much traction.
“Floating rate of interest (on deposits) is related to the repo rate. Suppose the repo goes up, the deposit rate also goes up. But, in this scenario when card rates might go up beyond that, there is not much interest for floating rate deposits,” Suresh Khatanhar, deputy managing director of IDBI Bank, said.
Several banks, including IDBI Bank and Yes Bank, have launched special deposit products such as the 555-day fixed deposits, offering higher interest rates of over 7%, especially around the festive season, in order to garner more deposits. Lenders are expected to go aggressive on raising deposits in coming months to support loan growth, as some of them are using excess liquidity at their disposal to drive credit.
This is true for financially-savvy investors, said Krishnan Sitaraman, senior director and deputy chief ratings officer of Crisil Ratings, adding that the product is more suitable for investors who can gauge where the interest rates might be headed.
“Floating rate fixed deposits is a good product, but it is relevant for financially informed investors. It may not be suitable for each and every investor. For instance, an investor who is not averse to taking a call on the directionality of interest rates may go for this product,” Sitaraman said.
Yes Bank believes that floating rate deposits is a good product in a rising rate scenario, but the lender needs to market it in a better manner, Prashant Kumar, MD & CEO, had said in a media call. The bank plans to continue the product even after the rising rate cycle is reversed, although it may not remain that lucrative then. The lender has garnered Rs 1,000 crore from this product since its launch, which is lower than what it had hoped for, Kumar said.
Over time, floating rate FDs might pick up as more and more people get to know about it, Sitaraman said. But as customers become more financially knowledgeable, they may not go for term deposits, but will opt for more complex products such as mutual funds, real estate and equity markets. Mostly, salaried or self-financed customers may opt for floating rate FDs, but typically it is seen that customers of public sector banks are more risk averse compared to private banks, so more customers of private banks are likely to go for floating rate FDs. he added.
Yes Bank launched floating rate fixed deposits in June, where the interest rates on the deposits is linked to the existing repo rate with a markup. The bank has set a floating interest rate of 7.0% on deposits maturing in up to 18 months and 7.50% on those maturing in up to three years. In comparison, fixed rate deposits of less than Rs 2 crore and maturing in same period receive interest rate of 6.25% and 6.75%, respectively. The bank launched floating rate deposits, linked to the repo rate, soon after the RBI initiated the rising interest cycle in May.
IDBI Bank is offering floating rate term deposit linked to the 91-days treasury bills (T-bills) and 364-days T-bills. Account holders can deposit Rs 10,000-Rs 1 crore under this product and the interest is paid by the bank on a quarterly basis. Interest reset occurs every calendar quarter. The tenure for the floating rate deposits ranges from a year to up to 20 years. The bank has set an interest rate of between 5.70% and 6.10% for Q3FY23 on floating deposits opened after November 1, 2018. It is offering higher rates for deposits opened before 2018. The bank has set the interest rate based on the anchor rate of 5.60% on 91-days t-bills for Q3FY23, which is the weighted average yield of treasury auction undertaken by the RBI. Similarly, fixed rate term deposits, maturing in a year to 20 years, attract interest rates in the range of 4.8-6.0%.
Incidentally, Yes Bank saw higher-than-industry average deposit growth of 13% y-o-y in Q2FY23 while IDBI Bank, which has a deposit base of Rs 2.2 trillion, has one of the highest CASA ratio in the industry.