Banking Central | Will banks follow up with deposit rate hikes?

Banks are struggling to attract savers

At a customary post-Budget meeting of the Reserve Bank of India (RBI) board last Saturday, Union Finance Minister Nirmala Sitharaman asked banks to sharpen focus on deposit mobilisation by deploying innovative tools and tackling competition from other investment products.

Sitharaman said bank executives should focus more on the core activity. “Requisite small deposits are a very important job of the bank, it may be grinding, monotonous, but that’s where your bread and butter comes from,” she said.

The finance minister's suggestion came close on the heels of the RBI asking the lenders to be more innovative in raising deposits. While announcing the monetary policy, RBI Governor Shaktikanta Das highlighted the lower deposit growth as a potential liquidity risk to banks. He observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with deposits trailing loan growth.

Das said the banks are taking greater recourse to short-term non-retail deposits and other instruments of

liability to meet the incremental credit demand. “This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues. Banks may, therefore, focus more on mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network,” said the governor.

The FM is likely to take up the issue of deposit mobilization with the chiefs of state-run banks soon, according to reports.

What do the numbers say?

Even though banks have been struggling to raise deposits, data suggests that the deposit accretion has improved in the recent months.

A report from rating agency CARE shows that in the last 3-6 months, credit growth has lagged behind deposit growth, reflecting a reversal in trend. According to it, the absolute growth in credit offtake stood at Rs 8.4 lakh crore for six months and Rs 3.8 lakh crore for three months, lagging behind deposit numbers of Rs 11.9 lakh crore and Rs 7 lakh crore, for the same period.

“We can observe that in absolute terms, deposit growth has outpaced credit growth, especially after the RBI’s circular on risk weights and comments on the CD Ratio indicative of the fact that banks have a disproportionate focus on raising resources, including via securitisation,” said the report. Besides, they are tapping certificates of deposits as well to raise resources.

If the credit and deposit inflows over the past three months and six months are studied, credit offtake at 5.3 percent for six months and 2.3 percent for three months has lagged the deposit growth numbers of 6 percent and 3.4 percent for a similar period, the report said.

This suggests banks’ aggressive campaigns for deposits offering such as special rate for senior citizens are showing results. Deposits rose at 11.3 percent on on-year for the fortnight ended July 12, 2024. In absolute terms, deposits expanded by Rs 23.9 lakh crore over the last 12 months to Rs 211.8 lakh crore.

According to CARE, deposit growth is expected to be prominent in FY25 as the banks intensify efforts to strengthen their liability franchise. The banks are also sourcing funds through certificates of deposits which have shown significant traction.

What can banks do to attract depositors?

Big banks will have to do more to attract depositors. They need to start with hiking rates. Deposit rates for two-three-year bucket, which typically offers the highest rate, stands around 7 percent to 7.5 percent for big lenders. For instance, ICICI Bank offers a rate of 7.25 percent for 15-18-month deposits. State Bank offers 7 percent. Compared with this, smaller banks are much aggressive.

Some small finance banks now offer interest rates of up to 9 percent to senior citizens on tenures up to 15 months. For instance, Equitas Small Finance Bank offers interest rates of 9 percent on 444-day-tenor FDs, while Ujjivan Small Finance Bank offers interest rates of 8.75 percent on 12-month FDs. Bandhan Bank is offering interest rates of 8.35 percent on 12-month deposits, while IndusInd Bank offers interest rates of 8.25 percent for similar maturity.

Big banks will have to up the game by offering more to attract depositors. The shift from bank deposits to other financial instruments such as mutual funds and other physical assets have happened as savers have been searching for higher returns. After paying tax and adjusting inflation, bank deposits yield miniscule returns to the saver, while mutual funds offer much higher returns.

The banks will have to also use technology to reach out to more customers, rather than simply rely on business through physical branches and launch aggressive advertisement campaigns to get the attention of depositors. The recent RBI draft rules on imposing higher run-off factor on internet, mobile banking-enabled deposits is a dampener in that sense.

Above everything, higher interest rates are the only way the banks can attract savers to be their depositors.

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