Amid increasing competition for deposit growth, financial institutions are enticing customers by offering attractive rates on select fixed deposit tenures. This comes as fixed deposits regain popularity as a preferred investment option after the recent tax modifications made to other debt instruments.

In March 2023, deposit rates rose faster than lending rates. The weighted average lending rate (WALR) on fresh rupee loans increased by 8 bps to 9.3 per cent whereas the weighted average domestic term deposit rate (WADTDR) on fresh term deposits increased 23 bps to 6.5 per cent.

“As banks continue their focus on deposits with increased intensity, a sharper increase in deposit rates is being witnessed and this has clearly been brought in by the rising rates on fresh deposits,” CareEdge Research said in a recent note.

Fresh deposit rates for PSU banks rose 18 bps, and for private banks by 17 bps, with March 2023 levels breaching their pre-pandemic levels, as per RBI data.

While most commercial banks are offering rates of up to eight per cent, small finance banks(SFBs) and NBFCs are offering rates of up to nine per cent owing to their smaller book size and higher requirement of granular retail deposits.

businessline had in December 2022 first reported that deposit rates of SFBs have touched their introductory levels of 8-9 per cent seen when most of these banks started operations in 2016-17.

Now, several large NBFC players much as Bajaj Finance, Mahindra Finance and Shriram Finance, too, are offering FD rates of 7.50-8.50 per cent, higher than or at par with mid-size private banks.

The rates are highest on deposits with a tenure of 2-3 years, going up to a maximum of 5 years in some cases. This is also largely due to the asset-liability management (ALM) requirements of lenders as bulk of the current lending is to retail borrowers where the average loan tenure is 1-3 years.

The rate hikes come at an opportune time for investors as fixed or term deposits have again started gaining favour following the Budget tax changes for debt mutual funds which brought all fixed income instruments at par from a taxation perspective. R Baskar Babu, MD and CEO of Suryoday Small Finance Bank, which hiked some FD rates on Friday, said that the offer of higher rates is for a limited period till May 30, in order to further build up the liabilities of the bank. This will help bring down the credit-deposit ratio of the bank from 120 per cent to about 110 per cent.

“We have finally seen the transmission of rate hikes reflecting in deposit rates with rates at near peak, so its the best time to fix in a higher interest rate via FDs,” said Manavi Prabhu, Head-Fixed Income, Anand Rathi Shares and Stock Brokers.

“Investors can also look at bank FD alternatives through bonds and FDs issued by blue chips or large AAA-rated NBFCs and HFCs for a longer investment horizon as a part of their asset allocation to fixed income,” Prabhu added.

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