Home >Industry >Banking >Rate cut puts squeeze on banks

Banks are staring at the unpleasant decision of reducing interest rates for millions of depositors already getting poor returns, as they try to protect margins while passing on the benefit of the Reserve Bank of India’s (RBI’s) latest repo rate cut to borrowers.

As deposits form a big chunk of banks’ sources of funds, any lending rate cut is either followed or preceded by a similar cut in deposit rates. Moreover, if borrowers who are currently under moratorium ultimately fail to repay, lenders stand to lose as well. While Bank of Baroda (BoB) has 90% of its eligible borrowers utilizing the moratorium, the number is 20% in case of State Bank of India (SBI).

According to the chief executive of a mid-sized public sector bank, a cut in deposit rates is inevitable and it is not clear any longer as to what the terminal rate or the lowest possible rate could be. At a time when large banks like State Bank of India (SBI) are lowering lending and deposit rates, smaller banks cannot afford to stay put, the banker said on condition of anonymity.

“I will have to survive in the loan market and if I do not lower interest rates on my loans, some other bank will take away the customer. But if I lower my deposit rates, my depositor base will suffer. It is quite a difficult situation," said the banker cited above.

Analysts at brokerage firm Motilal Oswal said in a note on 22 May that the continued monetary easing will drive further reduction in lending yields and banks have been sharply cutting retail and bulk deposit rates over the last few months.

“Large banks have reduced term deposit rates by up to 150 bps (basis points) to offset margin pressure. Overall, we believe that large banks with strong liability franchise would be able to tackle the margin pressure as compared to their mid-sized peers," the note said. One basis point is one-hundredth of a percentage point.

In April, State Bank of India chairman Rajnish Kumar said that depositors were complaining that their interests were not being protected. The central bank has cut its repo rate by 115 basis points since the beginning of 2020, including the 40 basis points cut on Friday.

“Ultimately, there is a limit on how much we can hit the depositors. I am getting a lot of feedback from depositors that SBI does not care about depositors," Kumar had said. After Friday’s repo rate cut, Kumar said SBI will convene a meeting of its asset liability committee, which decides on interest rate changes. India’s largest lender pays an interest of 5.5% to depositors below 2 crore in the one-two year bracket, after a 20 bps reduction on 12 May.

According to Mrutyunjay Mahapatra, officer on special duty at Canara Bank, customer spending has declined in the last couple of months, and people are more inclined to save. This surge in supply of deposits gives banks the freedom to lower deposit rates without the risk of losing out on low-cost funds.

“Banks have to align the rates to protect their margins, but we have to keep in mind the senior citizen depositors who keep large sums of money in banks. Indian lenders, therefore, are not always driven by business decisions but have to keep in mind the social aspect of deposit rates as well," Mahapatra said.

Since March last year, weighted average term deposit rates for public sector banks have fallen the least (39 bps). The steepest dip was in foreign bank deposit rates, by 147 bps in the same period.

Private banks lowered their deposit rates by 70 bps year-on-year as on March.

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