Deposit rates that have been ruling high for the last year or so may finally start heading down. Or so it seems after India’s largest bank — SBI — revised its rates down by 25 basis points for deposits in the one-three-year category effective September 18. Deposits for this tenure will now fetch 8.75 per cent — most banks on an average offer 9 per cent for similar deposits.

Heading down?

So, with the largest bank cutting its deposit rates, are other banks likely to follow suit as well? Many feel that an easier liquidity situation coupled with slowing credit growth may see others cut rates too.

On an average, deposit rates have been increased by 30 basis points across all tenures by all banks in the last one year. The Reserve Bank of India increased the key repo rate by 75 basis points between May 2013 and now. Banks have thus kept both lending as well deposit rates up in the last one year.

Deposit rates are a function of a bank’s cost of funds, liquidity situation and lending opportunities. If a bank has ample liquidity it may have enough headroom to bring down cost of funds by lowering deposit rates. Credit growth too, matters when deciding rates. If a bank has enough lending opportunities to deploy its funds, it may be able to pay better rates for its deposits. On the other hand, in a slowing credit growth scenario, banks would prefer to shed high cost deposits, to keep margins intact.

Credit growth in the banking system has fallen to 10.9 per cent recently, the lowest in a long time. Over the last two years of prolonged slowdown, credit growth for banks has slipped substantially. In 2012-13 and 2013-14 credit growth dipped to 13-14 per cent from 17-20 per cent in earlier years.

Banks have, hence, found it difficult to sustain margins. For one, they have not been able to pass on rate hikes by the RBI to customers in the form of higher lending rates. The average base rate (to which all lending rates are linked) for banks has only gone up by 5 basis points in 2013-14. However, given the tight liquidity scenario last year, banks kept deposit rates high to prevent flight of deposits. Average deposit rates went up by 30 basis points during the same period.

Given that now the liquidity situation for banks has improved substantially over the last year and credit growth is still languishing, banks may finally start to cut rates on deposits.

“Liquidity has been reasonably good for our bank for sometime now and corporate credit has not picked up in a big way. There is no point paying for deposits which cannot be deployed in profitable lending activities,” says K R Kamath, Chairman and Managing Director of Punjab National Bank.

While banks may have enough leeway now to tweak deposit rates, most may wait until the RBI’s policy announcement due by the month-end to tweak rates.

“We will hold rates maybe till policy and then take a call. For now, we are doing away with our bulk deposit rates for one year, which was marginally (5 basis points) higher,” adds Kamath.

Mixed signals

But there are others who believe that it may be early days yet to expect a widespread rate cut and that it would depend on individual banks’ asset liability situation (ALM).

“While SBI has cut rates for 1-3 year deposits, it has also raised its deposit rate for the 180 days to 210 days' bucket. The signal is quite mixed and one should not read too much from this action,” says Dr Rupa Rege Nitsure, Chief Economist, Bank of Baroda.

“The intent could be to pave the way for concessions on retail loans in the upcoming festive season. So far as Bank of Baroda is concerned, we do not have pressure of excess liquidity as we have consciously and in significant manner reduced our dependence on high cost, preferential rate deposits since the beginning of the current financial year. Hence, we intend to maintain ‘status quo’ on interest rates.”

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