Rate hikes may ease; banks to scurry for deposits

In the December monetary policy, the RBI hiked the repo rate by 35 bps to 6.25%.

RBI, banking
The central bank had hiked the repo rate by 50 bps each in September, August, and June. (IE)

Banks will continue to hike deposit rates in 2023 even as the Reserve Bank of India (RBI) may ease mechanisms to remove excess liquidity from the financial system, say experts.

“…Against that macro backdrop and at the current level of the repo rate, the need for further rate hikes is minimal,” Sidhhartha Sanyal, chief economist at Bandhan Bank, said. “However, garnering of deposit has been a huge challenge for the banking sector in general. There is a higher possibility of several banks hiking deposit rates in selected or all pockets.”

In the December monetary policy, the RBI hiked the repo rate by 35 bps to 6.25%. The central bank had hiked the repo rate by 50 bps each in September, August, and June. In total, the RBI has hiked the repo rate by 225 bps in 2022, including a surprise 40-bps raise in May.

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With the central bank looking to remove excess liquidity from the financial system, banks have had to scurry for deposits in order to meet the rising demand for loans. By and large, banks have been aggressive in hiking their deposit rates regardless of size and ownership.

“We believe it is normal for advances growth to lag deposit growth when the economy is slow and liquidity is abundant. And, vice versa, when the economy is improving and liquidity is tightening. So, this is exactly what we see now,” Sanjiv Chadha, MD and CEO of Bank of Baroda, said in the July-September earnings call.

“So, without again in anyway compromising our efforts in deposit mobilisation, we would want to make sure that any increase in rates is directed wherever there is a rate elasticity in terms of deposit growth. So, I think we’ll try to be very intelligent about it, but try to maximise deposit growth,” Chadha said.

On Monday, the state-owned bank hiked the interest rate on its domestic retail term deposits by up to 65 bps across various tenures. In November, the bank had hiked the interest rate on its retail term deposits by up to 100 bps. The rates are applicable on deposits of below Rs 2 crore.

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Similarly, State Bank of India (SBI) hiked the interest rate on its deposits by up to 80 bps in October, and by up to 65 bpas this month.

“…today, while we talk, we have got almost about Rs 3.5 trillion-plus money which is lying in the treasury instrument which we expect to redeem during the current financial year itself. So, you can very well expect that kind of growth can be there in the deposit to support the advances growth, which we expect to see in the remaining part of the year,” SBI chairman Dinesh Kumar Khara said in the July-September earnings call. “And also, having said that deposit is a franchise, you would have observed that in the last quarter or so, we have also increased our deposit rates because we don’t want to be unfair with our depositors.”

Canara Bank has also raised deposits worth Rs 1 trillion in the past three weeks.

Among private lenders, Kotak Mahindra Bank hiked the interest rate on its fixed deposits thrice in December alone, with the latest being a 25-bps hike on December 15. “This hike was linked to the change in the repo rate and how the competition reacts to it. In the market, the demand rush for liabilities is huge. By and large, all banks which want to change the deposit rate have done that,” Virat Diwanji, group president and head – consumer bank, Kotak Mahindra Bank, said.

This rush to hike deposits rates among banks comes when the growth in deposits has sharply trailed loan growth.

To put things in perspective, bank credit rose 17.2% YoY for the quarter ended September. In comparison, aggregate deposits rose a mere 9.8% YoY, RBI’s quarterly statistics on deposit and credit showed. The ratio of credit to deposits was 74.8% in July-September, the highest in 10 quarters.

The great reset

Come 2023, banks will continue to hike the interest rate on their deposits even as the RBI may cool off considering that inflation is now largely under control and growth remains a priority, say experts.

“The deposit rate hikes will continue at least in this financial year. The quantum of hikes is also being calibrated very finely. I do not know how this will pan out in the next financial year, but I do not see them not hiking the rate,” Jindal Haria, financial institutions director, India Research and Ratings, said.

However, these steady hike in deposit rate may lead to a compression in their net interest margin in the long-term as the increase in deposit costs will reflect with a lag on their books. “The increase in deposit cost will show up 5-6 months later. NIM may get compressed by a few basis points. This will not happen immediately. It will happen, say, 3-6 months down the line,” Haria said.

In this race for deposits, banks will increasingly be caught between expanding their loan books and managing their margins. Nevertheless, bankers are confident that the pressure on their margins will be managed considering that their six-month and one-year marginal cost-of-funds-based lending rate will continue to get reset in line with the monetary policy rates.

“Now, assuming we can keep our mix intact, if we can keep our NIMs intact, we do believe that there are sources of deposits out there, which you can raise, which will allow us to manage that growth, because there are a number of levers which are available to us,” Axis Bank CEO Amitabh Chaudhry said in the July-September earnings call.

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First published on: 31-12-2022 at 00:40 IST
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