Bank account holders alert! Your fixed deposit interest rates to rise soon
CRISIL in its research note states that bank credit in India will grow at a pace of 13-14% on average between fiscal FY19 - FY20, significantly faster as compared to the 8% seen in fiscal 2018, which would force a change in the deposit mobilisation plans of banks over the medium term.
There is a new trend taking place in banking system, which needs attention of both borrowers and depositors. Currently, banks credit growth continues to accelerate ahead, and on the other hand, the deposit growth is sluggish. As on January 18,2019, credit growth came in at 14.6%, whereas deposit growth at 9.7%. This means, that credit growth is much stronger than the deposit ones for banks. Such is a cause of concern for banks, but a major good news for new depositors. CRISIL in its research note states that, bank credit in India will grow at a pace of 13-14% on average between fiscal FY19 - FY20, significantly faster compared with the 8% seen in fiscal 2018, which would force a change in the deposit mobilisation plans of banks over the medium term.
To meet this credit growth, CRISIL says, “Banks will have to raise about Rs 25 lakh crore over the two fiscals. While Rs 5-6 lakh crore is expected to become available through the release of statutory liquidity ratio (SLR) funds, ~Rs 20 lakh crore would need to be raised through fresh deposits.”
Krishnan Sitaraman, Senior Director, CRISIL Ratings, “Lower deposit growth has meant a steady rise in the credit to deposit ratio (C/D Ratio) on a stock basis, which is expected to touch 78% by the end of fiscal 2019, compared with 73% at the end of fiscal 2017. Banks will need to raise at least Rs 19-20 lakh crore of fresh deposits until March 2020 to keep the credit-deposit ratio near 80%, which in itself would be highest in a decade.”
CRISIL expects banks to maintain on average ~4% surplus SLR when credit growth picks up, compared with ~8% today. This, when juxtaposed with the Reserve Bank of India’s plan to reduce the SLR limit to 18% by March 2020, would translate to a release of Rs 5-6 lakh crore from the SLR kitty to meet credit demand.
Consequently, the asking rate of annual deposit growth would be a significant 400 basis points higher at ~10% compared with ~6% growth in fiscal 2018. To be sure, this is way lower than the ~25% peak seen in fiscal 2007, explained CRISIL.
For your information, the deposit growth has been tumbling over the past decade, especially in past three years when there was significant drop, because interest rates offered on fixed deposits dipped below the returns on other financial investment avenues.
Such in return diverted the flow of household financial savings away from banks.
Rama Patel, Director, CRISIL Ratings, “Over the first nine months of this fiscal, banks have already raised deposit rates by an average of 40-60 basis points We expect banks to sharpen focus on deposit mobilisation over the medium term through attractive rate offerings across tenors in both bulk and retail segments. That, in turn, could further increase the cost of funds of banks, given that deposits account for the bulk of their funding.”
For lenders aka banks or other financial institution, cost of funds are determined as an very important tool in their business. They are generally, the key ways under which a bank generates money in its financial book. A bank decides interest rates which are paid to depositors including savings account and term deposits using cost of funds.
The reverse reaction of cost of funds is majorly seen in bank’s lending habit. The lender derive interest rates on loans like home, personal, vehicle and other products taking into consideration the cost of funds. It needs to be noted that, the interest rate banks charge on loans must be higher than the interest rate they pay to depositors. Thereby, lower cost of funds make banks more attractive.
Coming back to CRISIL’s trajectory, if banks continue to raise their deposit rates which will make their cost of funds higher. To maintain the gap between lending rates and deposit rates, a bank may in similar lines increase interest rates on loans just like the rates they will pay on deposits.
Meanwhile, CRISIL says, increasing volatility in the equity market, moderating flows into other investment avenues, and hike in bank deposit rates in recent months could bring some household financial savings back into bank deposits.
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The beginning of 2019, has already witnessed revision in fixed deposit rates. Recently, private lender hiked interest rates for below Rs 1 crore, Rs 5 crore and above deposits for both senior citizen and general customers. Read Here!
Anand Rathi in its research note said, " Given the current uncertainties on liquidity and aggressive OMO by the RBI, we do not expect banks to fund credit growth by a marked reduction of
excess SLR, especially since around 20% of the excess SLR is with 8 public sector banks under the PCA framework and just 12% with private private sector banks. The highly concentrated concentrated nature of credit growth also raises doubts about the sustainability sustainability of the present growth."
"We expect the upward trend of both deposit deposit and lending lending rates to
continue, irrespective of the RBI’s stance on interest rate," said Rathi.
From the above it can be said that, the new and small scale depositors will be biggest beneficiary, as their gains on deposits like fixed, savings account will be hefty.