Debt Watch. Lock into high deposit rates

If you have been enjoying high interest rates on your bank deposits over the past year or so, you may want to brace yourself for a haircut.

Taking a cue from the largest bank in the country, SBI, many other banks are likely to reduce deposit rates. Ample liquidity in the banking system, coupled with slowing credit growth, is likely to induce banks to trim deposit rates to maintain profitability.

It is hence time to take stock of your deposits and lock into high rates if you have any surpluses before deposit rates start trending down across all banks.

The Reserve Bank of India (RBI) has increased the key policy repo rate — the rate at which it lends to banks — by 75 basis points since May 2013.

Lending and deposit rates have thus been ruling high over the last one year. On average, deposit rates have increased by 30 basis points across all tenures and banks in the last one year.

But with the RBI keeping policy rates unchanged for a while now, why are banks looking to cut deposit rates?

Deposit rates are a function of a bank’s cost of funds, liquidity situation and lending opportunities. Ample liquidity gives banks enough headroom to lower deposit rates as they are not overly concerned about customers switching to other banks. Credit growth, too, matters when deciding rates.

A good lending opportunity, which means higher income, allows a bank to offer competitive rates on deposits.

But in a slowing credit growth scenario — similar to the one seen now — banks would prefer to shed their high-cost deposits in order to keep their margins intact. Credit growth in the banking system has fallen to 9.7 per cent as of September, the lowest since 2009.

Banks are now flush with liquidity, but do not have enough opportunities to lend. They are hence likely to cut rates on deposits to keep their margins from eroding.

In the month of September, SBI reduced rates on one- to three-year deposits from 9 per cent to 8.75 per cent.

It again lowered its deposit rates recently on very short-term deposits (up to 45 days) to 6 per cent.

Some other banks have tweaked their deposit rates too. City Union Bank reduced its deposit rate from 9 per cent to 8.75 per cent on deposits up to one year (271-364 days). It also lowered rates on one- to five-year deposits from 9.25 per cent to 9 per cent. Lakshmi Vilas Bank lowered rates on one- to two-year deposits from 9.3 per cent to 9.15 per cent and for over two-year deposits to 9.25 per cent.

Indian Overseas Bank reduced rates on its short-term 61-90 day deposits from 7.25 per cent to 7 per cent. Corporation Bank lowered rates from 8.5 per cent to 8.25 per cent on 180-270 day deposits.

While banks may lower rates across different time periods, the longevity of such a rate cut will depend again on the banks’ liquidity conditions, credit offtake and RBI policy action.

Given that lending will recover only gradually and policy rate cuts are unlikely to happen for some time, there is a chance that the cut in deposit rates will be carried out over the next two to three quarters, provided there is no sudden tightening in the liquidity condition.

So if you are looking for one- to three-year deposits, now is the time to pick the best rates and lock into them.

On average, most banks offer 9 per cent interest on one- to three-year deposits. DCB Bank and ING Vysya Bank offer 9.25 per cent for one- to two-year deposits. In the two- to three-year category, DCB Bank offers 9.3 per cent and Laxmi Vilas Bank and Karur Vysya Bank offer 9.25 per cent.

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