Money & Banking

Banks may raise deposit rates

Our Bureau Mumbai | Updated on March 27, 2019 Published on March 27, 2019

As credit growth surges ahead of deposit growth

With credit growth outstripping deposit growth so far in the financial year (up to March 15, 2019), banks may be forced to up their deposit rates to attract deposits.

Banks have witnessed a credit growth of 14.33 per cent, while the deposit growth lagged at 9.97 per cent. In the fortnight ended March 15, bank credit jumped by ₹35,223 crore. In sharp contrast, deposits with banks came down by ₹2,893 crore during the same period.

In the last one year, while the one-year marginal cost of funds-based lending rates of most banks moved up by about 40 basis points, the deposit rates have been sticky.

According to RBI data, term deposits of over one-year duration have been in the 6.25-7.50 per cent band as of March 15, against 6.25-6.75 per cent a year ago. Since interest rates on deposits have not moved in step with lending rates, there is an expectation that banks will increase deposit rates to garner resources to support credit growth.

According to SBI’s research report Ecowrap, the time has come for banks to experiment with floating rate deposits with perhaps better incentivisation.

“Separately, interest rates offered on deposits in India are demography-agnostic (barring the separate rate for senior citizens). However, going forward, in our view, this approach needs to shift to an age-wise interest rate structure, with rates linked to long-term bank deposit rates till a certain age group, and offering a higher-than-market-rate over that age group.

“This could, in one go, serve the multiple purposes of (a) ensuring a lower lending rate structure, (b) adequate returns for senior citizens, (c) lower interest expenditure and (d) an alternative to floating rate deposits,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

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Published on March 27, 2019
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