Difficult for Banks To Reduce Deposit and Lending Rates in Near Future

Moneylife Digital Team 30 January 2019

Economy & Nation

The government has increased its borrowing from the National Small Savings Fund (NSSF) due to the large interest gap between bank deposits and small saving rates. However, this may make it difficult for banks to reduce deposit rates and hence lending rates in the near future, says a research note from State Bank of India (SBI).

The report authored by Dr Soumya Kanti Ghosh, group chief economic adviser, SBI, says, "Interestingly, in the last few months, with bank deposit growth significantly lagging bank credit growth, banks have been increasing deposit rates to protect the possibility of deposit flight from banks. Such widening gap between deposit and credit growth requires banks to manage liquidity by focusing on deposit growth. Thus, it is imperative that we make bank deposits attractive by making it tax free."

The gap between the interest rates on small savings, which is average of public provident fund (PPF) and Sukanya Samridhi accounts rate and average bank term deposit for a tenure of less than one year, still remains around 98 basis points (bps).

For the current financial year (FY), the government had a buyback target of Rs71,941 crore and switch of Rs28,059 crore. The government has also dipped into small saving scheme to meet a part of its expenditure. "This has been in line with the trend observed in the past few years. This also helped keeping the bond yields in check by keeping interest rates low, simultaneously managing liquidity in the market," SBI says.

As against the budgeted amount of Rs75,000 crore, which was later revised to Rs1 lakh crore, borrowings through small savings have reached Rs45,396 crore by November 2018. For FY17-18, the government had completed the scheduled borrowing of Rs1.02 lakh crore through small savings scheme.

At the same time, during the fortnight ended on 4 January 2019, the aggregate deposits have registered a growth of 9.9% or Rs10.85 lakh crore while advances have increased by 14.5% or Rs11.85 lakh crore, the report points out.

According to SBI, such widening gap between deposit and credit growth requires build up of liquidity, which has to be met through the banking channel, since in the event of no buyback of securities and Reserve Bank of India (RBI) not doing aggressive open market operations (OMOs), banks would have to manage liquidity by focusing on deposit growth.

"The next year, may therefore see a hardening of interest rates. The huge redemption pressure may lead to liquidity squeeze and therefore, the government would have to go for switching of securities for longer term ones, which is the only option foreseeable at the present juncture, in the absence of buyback," it added.

Comments

User

Parimal Shah

6 years ago

The difference is incorrect. When we factor in 10% TDS above a celeing of INR 10000/- (now it is 40000/-) the difference is in fact negative.

B. Yerram Raju

6 years ago

Banks started looking at banking and I noticed several banks seeking deposits. But their risk appetite is still the lowest notwithstanding the gap between lending and deposit growth rates. Once the staff are re-oriented towards banking away from third party products, banks should re-emerge as effective intermediaries.