Amid falling interest rate scenario and with growing pressure to lower lending rates and improve transmission, bankers are in a fix over balancing interests of borrowers and depositors.
There is no doubt that deposit rates are expected to go further south after RBI's rate cut on Friday. Millions of depositors face the risk of earning a lot less on their savings as lenders try to protect their margins while passing on the benefit of the rate cut to borrowers.
As deposits form a large chunk of a bank’s source of funds, any cut in lending rates is either followed or preceded by a similar cut in deposit rates. Moreover, if borrowers who are under a loan repayment moratorium right now fail to turn around and repay past dues, lenders stand to lose on interest payments. While Bank of Baroda (BoB) has 90% of its eligible borrowers availing of the moratorium, the number is 20% in the case of State Bank of India (SBI).
According to the chief executive of a mid-sized public sector bank, a cut in deposit rates is inevitable and it is not clear any longer as to what the terminal rate or the lowest possible rate could be. The banker said that at a time when large banks like SBI are lowering lending and deposit rates, smaller banks cannot afford to stay put.
“I will have to survive in the loan market and if I do not lower interest rates on my loans, some other bank will take away customers. But if I lower my deposit rates, my depositor base will suffer. It is quite a difficult situation," said the banker quoted above.
Analysts at brokerage firm Motilal Oswal said in a note on 22 May that the continued monetary easing would drive further reduction in lending yields and banks have been sharply cutting retail and bulk deposit rates over the last few months. “Large banks have reduced term deposit rates by up to 150 bps to offset margin pressure. Overall, we believe that large banks with a strong liability franchise would be able to tackle the margin pressure as compared to their mid-sized peers," the note said.
Even before the latest round of rate cuts, SBI chairman Rajnish Kumar had said last month that the bank is getting feedback from depositors complaining that their interest rates are not being protected. The central bank has cut its repo rate by 115 basis points since the beginning of 2020.
‘Ultimately there is a limit on how much we can hit the depositors. I am getting a lot of feedback from depositors that SBI does not care about depositors," Kumar had said. After RBI lowered its repo rate by 40 basis points (bps) on 22 May, Kumar said SBI will convene a meeting of its asset liability committee (ALCO), the panel that deliberates on interest rate changes. India’s largest lender pays an interest rate of 5.5% to depositors below ₹2 crore in the one-two year bracket, after a 20 bps reduction on 12 May.
According to Mrutyunjay Mahapatra, officer on special duty (OSD) at Canara Bank, customer spending has declined in the last couple of months and people are more inclined to save. This surge in supply of deposits gives banks the freedom to lower deposit rates without the risk of losing out on low-cost funds.
“Banks have to align rates to protect their margins but we have to keep in mind senior citizen depositors who keep large sums of money in banks. Indian lenders, therefore, are not always driven by business decisions but have to keep in mind the social aspect of deposit rates as well," said Mahapatra.
Since March last year, weighted average term deposit rates for public sector banks have fallen the least (39 bps). The steepest dip was in foreign bank deposit rates, by 147 bps in the same period. Private banks lowered their deposit rates by 70 bps.
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