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FD Rates To Decline Further As System Flush With Ample Liquidity

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The country's leading state-run lender SBI in view of the excess liquidity was the first to slash FD rates on March 27, 2020 and soon other banks may follow suit. Post the FD rate revision, now 1-10 year SBI FD (of less than Rs. 2 crores) will fetch 5.7%. Earlier in the month, SBI reduced interest rate on savings bank account for all its customers to 3%. In the previous regime, SBI offered 3.25% interest rate on balance up to Rs. 1 lakh and 3% on savings a/c balance above Rs. 1 lakh.

FD Rates To Decline Further As System Flush With Ample Liquidity
 

As per experts ample liquidity and limited opportunities to lend in the system will nudge financial institutions to further cut deposit rates for cushioning their profitability levels amid falling interest rates.

And this cut in deposit rates shall be more prominent in the case of public sector banks in comparison to their private peers, which after the recent Yes Bank crisis cannot afford to slash rates as steeply.

Firstly, incremental lending, at least in retail and SME (small and medium enterprise), is now being linked to external benchmarks and in a falling interest cycle, they would adjust deposit rate to preserve spreads. Secondly, the system has enough liquidity," said Agarwal, head of financial sector ratings at India Ratings providing rationale for rate cut on bank deposits.

"Incrementally, in the next three months, we are unlikely to see any sharp rise in demand for credit and even banks would be cautious. The requirements could be mostly to meet operational expenses as additional demand for working capital is also likely to be modest," he added saying that currently the issue is of risk-aversion and has nothing to do with liquidity constraint.

Also, a top official at a PSB said rate cuts on deposits are unavoidable as banks have to safeguard their net interest margins or NIMs as there is sizeable cut on lending rates. "With a portion of my loan book linked to the repo rate now earning 75 bps less, my margins will be compressed if I continue paying an unchanged rate on deposits," said the banker.

 

In view of the Covid 19 outbreak to prevent economic crisis in the country, RBI last week announced a slew of measures that would flush the system with Rs. 3.74 trillion. Alone, the CRR cut by a huge 100 basis points will infuse Rs. 1.37 trillion liquidity, but banks shall still be risk-averse.

GoodReturns.in

Story first published: Tuesday, March 31, 2020, 14:03 [IST]
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