Personal banks shut hole with public sector banks on time period deposit charges

As private banks gain share in the banking system’s deposit base, they have begun to close the gap with public sector banks (PSBs) in terms of how much they pay for deposits. According to Reserve Bank of India (RBI) data on bank group-wise interest rates, the difference between the weighted average domestic term deposit rates of the two sets of banks fell to three basis points (bps) in November 2020 from 32 bps in December 2019. The data also point to poor transmission of rate cuts, with the weighted average lending rate (WALR) on outstanding rupee loans declining only 69 bps between February 2020 and November 2020 even as the repo rate fell 115 bps over the same period.

Private lenders are now comfortable paying less on term deposits even as growth in this category of deposits has been slowing for them in FY21 so far. The central bank’s recent Trend and Progress Report attributed the moderation in term deposits to easing interest rates and the lure of returns on competing asset classes. “Term deposit growth of PVBs decelerated sharply even as it quadrupled in PSBs,” the report said.

Analysts attribute the downtrend in private banks’ deposit rates to a longer-term phenomenon of market share shifts. In a report dated December 16, analysts at Morgan Stanley said that one of the challenges for Indian private banks was that of funding, as they were gaining market share in loans faster than deposits.

Consequently, loan to deposit ratios were high, and private banks were paying a premium on term deposits relative to PSBs. “However, we note that large private banks have significantly accelerated pace of deposit market share gains over the past two years, and hence reduced the premium that they pay on term deposits,” the report said.
Another factor that has helped private banks lower term deposit rates is a faster accretion of low-cost deposits. Credit Suisse said in a recent report that deposit growth in Q2FY21 remained strong for private banks, with smaller private banks continuing to see strong growth post the outflows in Q4FY20, aided by higher rates being offered. “Given excess liquidity, banks have focused on growing their low-cost deposits and CASA (current account savings account) ratios have moved up for most banks,” the report said.

At the same time, private banks have also been slower to pass on rate cuts to their borrowers. While PSBs’ WALR on outstanding loans fell by 69 bps between February and November 2020, for private banks the rate fell 59 bps. Kotak Institutional Equities (KIE) on Monday pointed out that the gap between outstanding and fresh lending rates has been in the range of 110-140 bps for the past nine months. Before that, it had been increasing, led by a steady decline in fresh lending rates.

Obviously, loan spreads remain quite high and a closer look at specific product segments would prove transmission to be less effective than what the headline figure suggests. “In a relatively low growth and heightened risk environment, especially after Covid, we note that the spreads have continued to remain high,” KIE said, adding, “The spread over G-Sec with deposits and loan rates has widened implying banks are seeing lower spreads on investments and better spreads on loan yields.”