Banks turn innovative to retain depositors as liquidity tightens

Banks

War for deposits is far from over, as the banking industry continues to face a liquidity crunch. From IDBI Bank, Bank of Baroda, Federal Bank to Equitas Small Finance Bank, the banking sector is going through another round of repricing of deposit rates.

Federal Bank has added a 444-day tenure term deposit for the general public with an interest rate of 7.5 percent for a single deposit of less than Rs 3 crore.                                    

IDBI Bank has introduced IDBI Chiranjeevi-Super Senior Citizen fixed deposit (FD) for resident individuals aged 80 years and from January 13,  with an interest rate ranging between 7.85 and 8.05 percent.

Indian Bank extended 300 days (Ind Supreme Product) and 400 days (Ind Super Product) to March 31, 2025, with an interest rate of 7.05 percent and 7.30 percent, respectively.

As the industry grapples with tight liquidity, it is forcing banks to ensure that depositors’ money is retained in the system, even if they have to pay a higher interest, bankers say. 

Liquidity has fallen from Rs 1.26 lakh crore surplus to Rs 2.22 lakh crore deficit in the past six months, forcing banks to come up with new products to retain depositors.

The special deposit schemes being launched now offer marginally better interest rates than those rolled out in the previous year.

“Depositors are being offered slightly higher interest rates than what was previously offered. It is being done to ensure that they don’t leave the bank either to park this money with another bank for a higher rate or to invest in market instruments,” said a retail head of a leading private bank on condition of anonymity.

Some of the one-time schemes launched by public sector banks in the previous year such as State Bank of India’s SBI Patrons and Amrit Vristhi Schemes may be extended or rolled over to retain depositors, sources said.

“Some of these schemes have had a good response from our customers and we may extend them on customers request,” said a senior official at a PSU Bank who didn’t want to be named because discussions are still on.

Deposit rates are far from peak

The banks’ moves seem in contrast to the guidance provided them for FY25 after the September quarter results. The banks had said the deposit rates may have hit a peak and should stabilise or reduce in a quarter or two.

A treasury head of a private bank indicated that the cost of funds across banks could increase by 10–20 basis points by the end of FY25 if the liquidity situation continues to remain tight.

“Unless we have a system level surplus for banks upwards of at least Rs 1 lakh crore, liquidity may remain a concern,” he said.

Concurring with this view, bankers say it is too soon to call the peak for deposit rates. Without the easing of the liquidity situation, even if the Monetary Policy Committee of the Reserve Bank of India, which meets early February, was to reduce the benchmark repo rate, it may not move the needle much on deposits.

Reduction in deposit rates seems very unlikely for at least a year, say bankers.