Banking Central: Deposit rates slashed — savers hit as banks move in to protect margins

Banks are cutting interest rates on deposits to protect margins

In the last few days, Indian banks have not been too kind to the most loyal of their customers — the fixed deposit (FD) holders.

With the Reserve Bank of India (RBI) signalling a softer monetary stance in its bi-monthly policy review in the previous week, lenders such as State Bank of India (SBI), HDFC, Yes Bank and now Bank of India have quietly trimmed FD rates. Some popular schemes such as SBI’s Amrit Kalash and Bank of India’s 400-day special plan have also been axed.

On the face of it, a 10-25 basis points cut here and a discontinued scheme there doesn’t sound like much but they do make bank deposits less attractive for savers, especially retirees.

Why are banks cutting FD rates?

This isn’t just about banks “adjusting” to the RBI’s recent 25 basis point repo rate cut to 6 percent.

It’s a desperate scramble to protect their thinning margins in a system that is starting to creak.

Banks have a strong case here. They are shelling out 7-8 percent to attract deposits while lending at sub-9 percent rates for home loans and other retail products. This isn't good for the business of banking.

Banks have mandatory reserve requirements. After accounting for requirements such as cash reserve ratio, statutory liquidity ratio and priority sector lending mandates, banks are practically lending at a loss.

As Uday Kotak recently put it, borrowing at 9 percent to lend at 8.5 percent isn’t a business model, it’s a death spiral.

So, banks are doing what they do best: passing the pain on to customers. Cutting FD rates and scrapping high-yield schemes such as Amrit Kalash (7.1 percent for 400 days) or Bank of India’s 7.3 percent offering isn’t about surplus liquidity. It’s about survival.

Credit growth has slumped from 16.6 percent to 12 percent year-on-year, leaving banks with funds they can’t profitably lend.

Who takes the hit?

The traditional savers are the ones hit the hardest. Retirees and risk-averse savers, already battered by inflation and taxed-to-death returns, are being squeezed further.

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New schemes such as SBI’s Amrit Vrishti may still dangle “decent” rates but they’re a downgrade from what was available a few months ago.

With the RBI likely to keep trimming rates through 2025, the outlook for FD holders is grim.

Banks are caught in a trap of their making — chasing deposits to stay relevant against fintechs and mutual funds, only to choke on the high rates they’re forced to offer.

Liquidity infusions from the RBI might ease short-term pressures but can't fix the structural mess — only about 41.9 percent of every Rs 100 deposited is available for lending, SBI’s data shows.

The rest is gobbled up by regulatory obligations or taxes. If the RBI wants banks to thrive, it needs to rethink these leaks not just tinker with repo rates.

What’s the solution?

A bigger fix — tax reforms — are needed. Why are FD returns taxed so heavily when they’re already barely keeping up with inflation? Kotak’s idea of tax breaks to lure younger savers into deposits isn’t just smart — it’s urgent. Courting senior citizens with marginally better rates is a band-aid, not a strategy. Without bold moves, banks will keep bleeding, and savers will keep paying the price.

Falling FD rates aren’t a blip, they’re a red flag. Banks are tightening their belts because the system no longer rewards them for doing what they’re supposed to do —channel savings into growth.

If we don’t fix this anomaly — regulatory drag, tax policies and deposit pricing — we’re not just looking at lower returns. We’re staring at a banking sector that is running on fumes and it’s the ordinary saver who’ll be left coughing in the dust.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)