MUMBAI: The Reserve Bank of India (RBI)’s recent data reveals a significant shift in deposit patterns, as term deposits outpaced the growth of current and savings accounts (CASA) in September 2024.
Banks are concerned that this trend could significantly raise their cost of funds, as term deposits generally carry interest rates more than double those of CASA deposits, which typically offer 2-4 per cent annually depending on the bank and account type.
Term deposits now account for 61.4 per cent of total deposits, up from 59.8 per cent a year ago, according to the Quarterly Basic Statistical Return (BSR): Deposits with Scheduled Commercial Banks – September 2024, released on Tuesday.
This trend reflects a larger migration of deposits toward higher-yielding term deposits, presumably spurred by the expectation of a rate cut in the next monetary policy. RBI has not touched its policy rate for more than 20 months since it was raised from 6.25 per cent to 6.5 per cent in February 2023.
The report highlights that term deposits offering over 7 per cent interest rates rose to 68.8 per cent of total deposits, compared with 54.7 per cent in September 2023. Year-on-year deposit growth stood at 11.7 per cent, remaining consistent with the previous quarter.
Impact on NIM
The shift in deposit composition could exacerbate challenges for banks’ net interest margins (NIMs), which are already under pressure due to regulatory changes in penal interest rules announced by the RBI recently. The recent regulation mandates that banks clearly outline penal charges with terms and conditions, potentially compressing the spread between interest income and expense.
Moreover, the RBI regulation disallows banks from charging the additional penal interest to be charged on the whole of the outstanding loan amount thus reducing the interest income of the banks considerably. The large shift to term deposits is taking place at a time when the banks are frantically trying to build their CASA more than ever before.
The growing term deposits portfolio intensifies the strain on the banks’ as banks must offer higher returns to attract and retain funds. Unlike CASA deposits, which typically come with low or negligible interest costs, term deposits increase funding costs for banks.
Consequently, this dynamics might further narrow NIMs – a key profitability metric – particularly in a high-interest-rate environment.
Challenges
The surge in term deposits aligns with the perceived fag end of the RBI’s monetary policy tightening, where interest rate hikes have incentivised savers to lock in fixed returns. However, this could create a challenging operating environment for banks as their cost of funds rises.
To maintain profitability, banks might face the dual challenge of balancing the costlier deposit base with the need to maintain competitive lending rates in a slowing credit growth environment.
As banks adapt to these structural changes, they may need to explore innovative ways to manage funding costs, optimise asset-liability management, and sustain NIMs. The evolving deposit landscape underscores the need for proactive strategies to navigate the dual pressures of regulatory compliance and changing customer preferences.
