Banking Central| A good year ahead for bank depositors

Of late, banks are competing hard to attract depositor attention. Lenders are offering high rates, special schemes and even resorting to door-to-door campaigning to get fresh deposits. Kotak is the latest bank to join the bandwagon.

On February 9, Kotak Mahindra Bank said it will increase the rate offered on fixed deposits across tenures by up to 25 basis points. For senior citizens, the bank will now offer up to 7.6 percent per annum for deposit amounts of up to Rs 2 crore.

Over the last few months, most banks have increased their deposit rates by 1-2 percent.  On February 6, Bandhan Bank said it will raise the deposit rate by up to 50 basis points, which takes the effective rate for senior citizens to 8.5 percent. Similarly, a clutch of other banks, including the State Bank of India (SBI), HDFC Bank, and Kotak Mahindra Bank have raised their FD interest rates. Small finance banks (SFBs) like AU, Jana and Equitas hiked their interest rates too. The trend is likely to continue as banks strive to wedge the gap between credit and deposit growth.

Why are banks in a hurry to hike rates? There is a mix of factors at play.

First, the RBI rate signals need to be passed on to the customers on repo rate-linked loans. Presently, nearly 48 percent of the total loans are repo rate linked in the industry, according to India Ratings and research. The RBI has hiked the repo rate by 25 basis points in the current rate hike cycle. The transmission of RBI rate hikes into final bank lending rates happens with a lag. In simple words, banks have no other choice but to pass on the lower rates to the customer.

Second, the difference in credit and deposit growth remains big. Bank credit is at over 16 percent while deposit growth is in the early double digits. Why is this a concern? Money raised through deposits is the primary avenue for banks to lend for business. This becomes even more critical when credit growth far outpaces deposit growth. The competition forces banks, especially smaller ones, to hike their deposit rates to lure customers.

Also, the recent increase in small savings rates by the government will force the banks to up their rates as well. The government has increased small savings rates across different small savings instruments. This will put banks under pressure to make deposit rates even more attractive.

If one looks at the broader data, deposit rates are now slowly inching back to the 9 percent mark, with some NBFCs already offering that rate to select depositors. With the latest round of 25 bps rate hike, banks will likely increase their deposit rates by another quarter to half bps.

With rate of returns on bank deposits now beating inflation, real rates have turned positive, prompting many investors to move back to safer bank fixed deposits from volatile equity markets. Overall, 2023 will likely turn out to be a good year for savers, while for borrowers cost of borrowings will obviously move up.(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)