Mumbai: State Bank of India (SBI) on Tuesday raised rates on bulk deposits by 50-140 basis points, a move that may prompt rival lenders to increase interest rates, given tight liquidity conditions and the expected rise in loan demand.
This is the second such rate hike by SBI on deposits over Rs1 crore, usually referred to as bulk deposits, in two months. SBI’s bulk as well as retail term deposit rates range between 5.25% and 6.25%. One basis point is one-hundredth of a percentage point.
“Our bulk deposit rates were sharply lower than the market post demonetisation. With this revision, we are realigning it with the market rates. Since the share of bulk deposits in total deposits is low, cost of funds is not expected to rise sharply,” said P.K. Gupta, managing director at SBI. He added that the liquidity position of the bank is comfortable.
System-wide liquidity surplus has narrowed substantially and is currently at a slight deficit of around Rs15,000 crore owing to tax outflows and lower government spending. This, along with an expected increase in loan demand, may lead to a rise in deposit rates, bankers said.
“Liquidity conditions have tightened because of lower government spending and monetary tightening. This, along with the seasonal pick-up in credit in the fiscal fourth quarter, can lead to a rise in deposit rates across the board. Because lending rates under MCLR (marginal cost of funds-based lending rates) are based on the incremental cost of funds, it may lead to some rise in lending rates as well. For Axis Bank, we raised deposit rates and MCLR recently,” said Rajiv Anand, executive director of retail banking at Axis Bank Ltd.
To be sure, any hike in deposit rates will be gradual and dependent on each bank’s credit demand, said bankers and analysts. This is to ensure that deposit rate hikes do not lead to a sharp increase in lending rates, especially at a time when credit growth is witnessing a revival, they said.
Rating company Icra Ltd said it expects incremental bank credit offtake to surge this quarter because of seasonal factors. “In order to support the same, the banks will need to mobilize additional deposits as the credit-deposit ratio has increased,” it said in a note on Tuesday.
Reserve Bank of India data showed that bank loans grew 11.1% year on year as on 5 January, sharply higher than the deposit growth rate of 4.5%.
Other options banks have to fund the credit growth is through selling certificates of deposit (CDs) or offloading their investment in government securities over and above the regulatory requirements, said banking analysts. However, both these options have their limitations.
CD rates have risen sharply due to seasonal factors such as tight liquidity conditions and tax outflows. Currently, bank CDs maturing in April, the most active paper in the market, are priced around 7.2%, bond dealers said. Additionally, banks run the risk of running asset-liability mismatches in giving long-term loans through selling CDs.
Bank CDs are securities maturing in 15 days to up to one year. Usually, most bank loans are above one-year maturity.
“While banks have an option of reducing their statutory liquidity ratio holdings and deploying the same towards incremental credit, they may prefer not to do so, as it may trigger an upward movement in bond yields and add to their treasury losses. Accordingly, we expect banks to focus on deposit mobilization to support the credit growth by offering better rates to depositors” said Karthik Srinivasan, group head of financial sector ratings at Icra.