Indian lenders are expecting stronger inflows of retail deposits as the interest rates offered to individuals to park money with banks have risen in recent months, bringing them at par with those offered by government small saving schemes.
The weighted average rate on domestic term deposits has increased by 55 basis points to 5.62% in November from 5.07% in May, when the Reserve Bank of India began its rate hike cycle, as per central bank data. Government-backed small savings schemes, on the other hand, offer anywhere between 4-7.60% currently. While that is the same as when the RBI started raising rates, the rates on one-, two- and three-year time deposits were hiked by 110 basis points each for the January-March quarter from the prior three-month period.
Banks started raising lending rates almost immediately after the RBI's first rate hike last May, but started increasing deposit rates roughly only around June. Currently, most large lenders offer deposit rates between 6.75% and 7.30% for 1-2 year deposits and between 5.75% and 7.25% for longer-term deposits. Smaller banks such as AU Small Finance Bank Ltd and DCB Bank Ltd offer even higher rates, of about 7.5% to 7.75%. Bank FD Rates (%) 1-2 years 3-5 years State Bank of India 6.75 6.25 Bank of Baroda 7.05 6.25 HDFC Bank 7 7 ICICI Bank 7 7 Axis Bank 7.26 7 Data as on respective banks’ website on Jan. 20. Compiled by BankBazaar.com Bank lending is growing at a faster clip than deposits currently, but this difference in growth rates is expected to narrow in the coming months due to higher rates, said Prashant Kumar, MD of Yes Bank. Loans given by Indian banks rose nearly 15% in the fortnight ending Dec. 30, compared with the same period a year ago, while deposits rose only 9.2%, according to the latest RBI data. The narrowing difference between rates on bank deposits and government small savings schemes would, bankers said, mean more retail funds flowing into term deposits. "There could be a shift in investments from small savings schemes to bank deposits," said Suresh Khatanhar, deputy managing director at IDBI Bank.
He expects deposit rates can go up by another 25 basis points across the system. Federal Bank's executive director Shalini Warrier agreed. "Incremental flow of funds is likely to be more towards bank deposits compared to small savings schemes as differences in interest rates get narrowed," said Warrier. "We are already witnessing it happening and it is likely to pick up." Small saving scheme Rates in percentage Post Office Savings Deposit 4.00 1-year Time Deposit 6.60 2-year Time Deposit 6.80 3-year Time Deposit 6.90 5-year Time Deposit 7.00 5-year Recurring Deposit 5.80 Monthly Income Account Scheme 7.10 Sukanya Samriddhi Account Scheme 7.60 Public Provident Fund Scheme 7.10 National Savings Certificate 7.00 Kisan Vikas Patra 7.20 (Reporting by Siddhi Nayak and Nupur Anand; Editing by Savio D'Souza)