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Race for deposits: Small finance banks turn up the heat, offer 8%-8.75% return on FDs

The reason, analysts say, is the widening wedge between credit and deposit growth, tight liquidity conditions and the prospects of a further pick-up in lending.

November 24, 2022 / 08:48 AM IST

In a bid to lure retail depositors, lenders are raising interest rates on fixed deposits (FDs), taking their rates back to the pre-COVID levels. Leading the race for high FD rates are small finance banks (SFBs).

Consider this. On November 22, Ujjivan Small Finance Bank said it will pay an 8 percent interest rate on its 560-day deposits for regular customers and 8.75 percent for senior citizens.

The hike in rates is in line with the bank’s retail strategy of building granular deposits and the evolving macro-economic situation, Ittira Davis, Managing Director and Chief Executive Officer, Ujjivan SFB, said in a statement.

With this, Ujjivan ranks among banks which offer the highest rates among SFBs at this point.

Others are not too far behind. Jana Small Finance Bank, on November 15, said it will offer up to 8.5 percent interest rates on FDs to senior citizens. Also, under a scheme called Fixed Deposit Plus, it will offer 7.75-8.35 percent to regular depositors.

Similarly, Suryoday SFB recently said it will offer up to 8.26 percent on tenure of 999 days. It’s not just SFBs, even bigger lenders have hiked FD rates in recent weeks. Leading banks, like SBI, ICICI Bank, and HDFC Bank, too, have hiked rates on deposits in recent weeks.

FD rates are back to the 8-9 percent levels after a gap of six to seven years.  Post-2014-15, rates have broadly fallen.

Why are banks on a rate hike spree?

The simple answer is liquidity tightness in the banking system. Credit growth is faster than deposit growth and this wedge has been widening. According to RBI data, as on November 4, year-on-year (YoY) deposit growth and credit growth stood around 8 percent and 16.81 percent, respectively.

“If you see the RBI data, deposit growth is far lower than credit growth. That’s why banks are scrambling for deposits. The resultant liquidity tightness is playing out,” said Sanjay Agarwal, head of BFSI vertical at CARE rating.

Agarwal said rates are set to inch up even higher. “Even at 8 percent, it is barely touching the pre-COVID level. Rates will move up higher,” said Agarwal.

SBI banker and industry consultant Naresh Malhotra echoed the view. “Consequent upon the uptick in the capital investment cycle, credit demand is robust. Hence, there is an increase in interest rates to mobilise deposits for fulfilling the credit needs of the economy,” said Malhotra.

“The regulatory stance is also indicative of the tight money policy to check inflation. Both factors are contributing to the upward trajectory of deposit interest rates,” Malhotra added.

Rate war on

Banks are luring customers with higher rates of interest, festival offers, etc., in the face of stiff competition. In October, Moneycontrol published a report about a viral video on social media about a Canara Bank branch chief manager who hit the streets to campaign for the bank’s ‘666 days' FD scheme.

In the video, a man was seen carrying a microphone, accompanied by his colleagues, visiting shops and apartments.

Under the 666-day FD scheme, the state-owned lender provides a return of 7 percent per annum for general citizens and 7.5 percent for senior citizens, for a deposit lower than Rs 2 crore.

Another rate hike coming?

Interest rates may not have peaked yet.

The MPC is right now playing a catch-up game. The panel has hiked the policy rates by 190 basis points (bps) in the current rate hike cycle after waiting for too long. Inflation hasn’t shown any sign of abating to the desired level so far.

The RBI expects the softening to happen by the first quarter of the next fiscal year.

It is fair to assume that, in all likelihood, another 25-50 basis-point rate hike will happen in December, although the tone of the policy language may be a bit less hawkish. One basis point is one-hundredth of a percentage point.

If that happens, banks may have to go for another round of interest rate hikes very soon.
Dinesh Unnikrishnan is Editor-Banking & Finance at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
first published: Nov 23, 2022 02:44 pm