Bank deposit rates are playing catch up with lending rates in the backdrop of the Reserve Bank of India (RBI) frontloading a 50 basis points (bps) repo rate hike and incremental credit growth outstripping deposit inflows. 

Since the RBI’s 50 bps rate hike on Friday, several banks, such as YES Bank, Indian Overseas Bank, Indian Bank, Canara Bank, Jammu & Kashmir Bank, Kotak Bank, and Ujjivan Small Finance Bank, have hiked the rates on their fixed deposits in certain maturity buckets by 10–25 bps.

Other lenders such as IndusInd Bank, Bandhan Bank, and ESAF Small Finance Bank have revised rates for their savings accounts, whereas ICICI Bank has increased rates on bulk deposits—those with an amount of over ₹2 crore.

‘Sitting on excess liquidity’

Karthik Srinivasan, Group head-financial sector ratings at ICRA, observed that banks are still sitting on excess liquidity, so they are able to dip into that to extend more credit.

He said if credit continues to outpace deposits and the liquidity gap goes down significantly, then deposit rates will also increase sharply.

Ittira Davis, MD & CEO of Ujjivan Small Finance Bank, said: “If you look back 3 years ago, rates were about 7-8 per cent among small finance banks. So we’re going back to that sort of scenario; that’s the direction we are going. If there is a further increase in the repo rate, we’ll see more of an increase in deposit rates.”

So far, banks have passed on the repo rate hike fully to retail and MSME borrowers as their loans are linked to an external benchmark-based lending rate (EBLR) and partially to corporate borrowers, whose lending rates are linked to MCLR (marginal cost of funds-based lending rate). However, transmission on the deposit side has been lagging.

The central bank kicked-started the rate hike cycle in May with a 40 bps rate hike, which was followed by another 50 bps in June. The latest hike in repo rates on Friday, to 5.4 per cent, took the cumulative increase to 140 bps.

That deposit rate hikes have lagged lending rate hikes is underscored by the fact that over May-June, the weighted average lending rate for banks increased by 43 bps on fresh loans and by 21 bps on outstanding loans. The increase in the median one-year MCLR was also 15 bps. Yet, the rise in outstanding term deposit rates was only 10 bps, as per the latest RBI data.

Though some lenders such as State Bank of India, Punjab National Bank, and Bank of Baroda started increasing FD rates in July, the extent of the hike was largely lower compared to the increase in lending rates.

In the post policy conference, RBI Governor Shaktikanta Das said that banks are most likely to pass on the impact of the rate hike to the depositors to support the improving credit demand.

“That trend will continue because when there is a credit off-take, obviously, the banks can sustain and support that credit off-take only if they have higher deposits. They cannot be relying on central bank money on a perennial basis to support credit off-take; they have to mobilise their own resources and own funds,” Das said.

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