Home / Industry / Banking /  Why some banks are still offering a 7% deposit rate

Interest rates offered by most banks on fixed deposits (FDs) have come down over the last few months and are now largely in the 5-6% range. However, there are still some banks that are offering an interest rate of 7% or more. Why is that the case? Mint explains.

Why have FD interest rates fallen?

Between 27 March and 22 May, a period of less than two months, total FDs of banks have gone up by 4.33 trillion. There could be multiple reasons for this, from the weakness of the stock market to people generally wanting to save a little more to be ready for the tough economic situation ahead. During the same period, borrowers repaid more loans than they took on, and overall bank credit contracted by 1.48 trillion. This meant that there was a huge amount of deposits with banks but that this money did not have much demand in the form of loans. That has led to lower interest rates on bank deposits.

What kind of rates are banks offering?

The excess supply of deposits has led most banks to cut interest rates to 5-6%. State Bank of India (SBI), the largest bank in the country, offers an interest of 5.1% on a two-year fixed deposit. Kotak Mahindra Bank offers a lower rate of 4.75%. However, banks such as IndusInd, DCB Bank, IDFC First Bank and Yes Bank offer interest rates of 7-7.25%. The reason for this is very simple. Banks that are deemed to be safe can raise deposits at lower interest rates, while lenders that the public does not consider as safe need to offer higher interest to attract deposits. This is why interest rates vary. This is a benefit of competition.

What is the reason for such a wide range of rates?

While total deposits of banks went up on the whole, some banks saw a fall in their deposits. IndusInd’s total deposits fell by about 7% from  2.17 trillion as of December 2019 to 2.02 trillion as of March 2020. Yes Bank’s total deposits fell nearly 37% from December 2019 to March 2020, from 1.66 trillion to 1.05 trillion. These banks have to offer higher rates to attract deposits.

So, what does this imply?

Banks like Yes Bank, IndusInd, and IDFC First Bank need to offer a higher rate of interest to attract deposits. However, Kotak, SBI and others are all offering less than 6% as they are deemed to be the safest of the lot and are strong brands. Meanwhile, Bandhan Bank stands somewhere in between and hence, has to offer a rate of 6.5%. In 2020, the depositors are making a distinction in their minds between the good banks and the not-so-good banks, and they have moved their money from the not-so-good banks to the goods banks.

What does this mean for depositors?

There is a wide variety of options available when it comes to interest rates on FDs. For depositors who are willing to take on some risk, interest rates higher than 7% are on offer. However, it is worth remembering that Yes Bank was recently put under a moratorium and a large proportion of the deposit remained inaccessible for some time. If you are the kind of person who doesn’t like risk when it comes to deposits, you need to settle for less than 6% interest.

Vivek Kaul is the author of the Easy Money trilogy.

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