Credit Policy: Banks likely to offer floating rate deposits

As a home loan borrower, have you felt that it was unfair for banks to charge you floating interest rates? As interest rates move up, higher EMIs can burn a hole in your pocket. But you may have some reason to cheer. With the adoption of the new lending rate norms, banks may offer floating rate deposits. So next time, interest rates start to creep up, your deposits can earn you higher interest.

Under the new norms, banks have to fix lending rates benchmarked against the Marginal Cost of Funds based Lending Rate (MCLR). The latest (at the time of review) rates offered on deposits or borrowings is taken into account. Also, banks can have different MCLRs across various tenors. This presents a huge challenge for banks that will have to match the tenures of their deposits and loans, to reduce volatility in earnings.

For one, banks will have to ensure that all loans are not reset at the same time. Then banks will either have to increase the duration of the assets (loans) or reduce the duration of the liabilities(deposits).

There are two ways to reduce liability duration. One is to take short-term deposits. So, in a falling interest rate scenario, the banks’ deposits get re-priced faster than loans. But in such a scenario, the bank will run a liquidity gap — funding a five-year loan with a six-month deposit.

So, banks will have to come up with floating rate deposits.

Floating rate deposits will work on the same lines as your floating rate loans. Rates on floating rate deposits are likely to track a particular benchmark instrument. The RBI in its policy review in April last year, indicated establishing an independent benchmark administrator, which will publish various indices of market interest rates. This can be used by banks to price their various products.

But remember, the need for banks to introduce floating rate deposit is more now, in a falling rate scenario, as they struggle to maintain margins. For you though, such deposits may only make sense in a rising rate scenario.