Loans outpace deposits, might nudge interest FD rates up

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The common depositor who has enjoyed rising interest rates in fixed deposits over more than a year now thanks to rising repo rates, could expect another round of small rise in interest rates, though for a completely different reason.

Though the Reserve Bank of India has held the key policy rates unchanged for the past few months, deposit rates in banks might be nudged upwards, simply because the growth in borrowings from banks has recorded a faster rate than rise in deposits, The Times of India has reported. While bank deposits grew by a modest 6.6% in the period April-August this year, the weighted average term deposit rates rose 27 basis points, according to RBI data. However, growth in bank credit grew at a much faster clip at 9.1%.

While bank credit stood at Rs 12.45 lakh crore during the above-mentioned time window, deposits rose to 6.6%.

This financial year, the growth in current and savings accounts was recorded at 0.9%. FDs grew at 7.2% during the same time period.

The figures accounted for the mega-merger of HDFC Bank and HDFC. The loans issued by the housing finance major was higher than the deposits it garnered and it expanded the credit-deposit gap.

On scrutiny, it becomes clear that the banks have lent out Rs 12.4 lakh crore during this period, while garnering deposits of Rs 11.9 lakh crore. Government securities that attracted investments by banks has helped the tackle the gap.

The weighted average term deposit rate of banks has moved up from 6.28% in April to 6.55% in July this year.

“It is not surprising that the cost of deposits did increase in July based on RBI data, which would have persisted in August too,” said chief economist at Bank of Baroda, Madan Sabnavis. He said that the liquidity in money markets is an index of the difference between credit and deposit growth.

There are already some movements in the interest rates. PNB raised interest rates in the week beginning September 4 by 0.25 percentage point. The highest rates of interest are offered by small finance banks. For example, Unity Small Finance Bank offers 9% on a FD of 1001 days. The highest rate offered by a PSU bank is 7.4% offered by Punjab & Sind Bank. The private bank to offer the highest rate for deposits is DCB – 7.75% for terms between 2 years 1 month and 3 years 1 month.

Economists are of the opinion that if cash withdrawals lead to liquidity shortages, deposit rates might inch up. In September, there might be outflows due to advance tax. It might even exceed the Rs 25,000 crore that RBI will release from the incremental CRR requirement.