High returns on bank deposits may keep interest rate in check

BENGALURU: Some mid-sized private banks are offering interest rates as high as 6% on savings account balances, while public sector and private banks have improved their term deposit rates. These higher returns, aimed at boosting deposits, could keep interest rates steady despite two successive rate cuts by the RBI.
The battle for deposits comes at a time when advances have outstripped deposit growth.Banks have added Rs 12.06 lakh crore to their outstanding advances as on March 13, 2019 — a 14% year-on-year increase. As compared to this, aggregate deposits have increased by Rs 11.14 lakh crore — a growth of 10%.
“Competition from smaller private banks is forcing larger banks to offer higher rates on large savings deposits. Even on term deposits, the band of interest rates has expanded to 140 basis points (100bps = 1 percentage point) from 60-70bps a few years ago (highest rate versus lowest rate on 1- to 3-year term deposits),” added CLSA banking analyst Aashish Agarwal.
In the last six months, midsized banks have started offering relatively better rates on savings account, said Kotak Mahindra Bank president (retail liabilities and branch banking) Virat Diwanji.
Last November, ICICI Bank increased rates by 25bps for term deposits of less than Rs 1 crore. For deposits with a maturity of more than 2 years, the interest rate was raised to 7.5%. “Given the volatility in the markets, there has been a revival of interest in FDs as they offer customers a combination of attractive interest rates, liquidity and assured returns,” said ICICI Bank senior general manager & head (retail liabilities - group) Pranav Mishra.
Jana Small Finance Bank head (retail financial services) Ajay Pareek said there is a clear asset and liability growth mismatch on bank books, resulting in an increase of deposit rates by banks to attract more deposits.