Public Sector Banks (PSBs) may see a portion of their deposit base shift to longer maturities as customers chase higher returns in the falling interest rate scenario. This may weigh on the banks' margins for a few quarters at least.
Data released by the Reserve Bank of India (RBI) showed that the weighted average domestic term deposit rate (WADTDR) for PSBs has increased to 6.79 percent in August, which is higher by 5 basis points from the previous month. PSBs account for 70 percent of all deposits in the Indian banking system.
In fact, the term deposit cost for PSBs is inching closer to the levels seen in January, which is before the RBI started cutting rates in this cycle. For private and foreign banks, these costs have fallen by 10 basis points and 55 basis points respectively, in the same period.
"In a declining term deposit rate scenario, rise in WADTDR by 5 basis points in a month is cause for concern," said Rakesh Kumar, banking analyst at Elara Securities. "This is possible if deposits are moving to longer term maturities," Kumar said, adding that it can only be ascertained after banks declare their quarterly results.
Usually, the average deposit maturity period is between 1-2 years, but interest rates in this bucket have seen some reduction. Its the longer term fixed deposit rates that are still sticky.
For example, State Bank of India (SBI) has slashed its term deposit rates maturing between 1-2 years by 10 basis points for retail deposits and by 30 basis points for bulk deposits, effective October 10. Other rates remain unchanged.
"Deposit rates are going down in lower brackets, where RBI's policy action has quicker impact. But reduction in the longer term buckets are yet to catch up. It will take time to bring them down as well," said a senior official at a state-run bank.
As the rates go down, depositors tend to lock in at longer maturities in anticipation of more cuts. Currently, SBI is paying up to 5.8 percent for maturities up to a year and 6.25 percent for deposits of more than two years.
"Deposit rates could be slashed more, but it is likely to be between 1-3 years buckets. It will take time for the policy rate cuts to feed into long term fixed deposit rates," said a treasury official at a state-run bank.
This may lead to some pressure on banks' margins, as lending rates are expected to fall further.
In the Monetary Policy Review announced earlier this month, RBI Governor Shaktikanta Das said that the central bank will continue with the accommodative stance "as long as it is necessary" to revive growth, while ensuring that inflation remains within the target.
The MPC, that has reduced policy rates by 135 basis points since February, is largely expected to follow up with more rate cuts in rest of the current financial year.
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