PSU banks are giving the best FD rates in eight years. Here's why

Data from the Reserve Bank of India shows the banks have taken their average term deposit or fixed deposit rate to the highest in nearly eight years.

This September, the weighted average domestic term deposit rate for public sector banks (PSBs) touched 7%, a first since March 2017. In the same month, private sector lenders offered 50 basis points (bps) lower on term deposits, the data showed. A basis point is one-hundredth of a percentage point.

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Significantly, PSBs have been offering higher term interest rates than private banks for the past couple of years, but the past few months have seen this gap widening.

Bankers and experts attributed this development to rising credit-deposit (CD) ratio at these lenders, forcing them to shell out more on deposits. The CD ratio indicates how much of a bank’s deposit base is being utilized for loans. A higher ratio could lead to liquidity pressures for the lender.

A public sector banker said that the regulator is not happy with high CD ratios in the system and has conveyed it to bank heads in private conversations. The banker, who spoke on condition of anonymity, said that to sustain credit growth and to try and keep depositors away from other investment options, state-owned lenders have had to raise rates.

There are other issues behind this trend as well. “PSBs have been struggling to raise deposits, facing challenges of lagging customer service, weaker infrastructure and ageing customer profile," said Prakash Agarwal, partner at debt market advisory firm Gefion Capital. “This means PSBs would have to offer attractive interest rates to raise deposits."

Relatively better positioned

On the other hand, private sector banks have been doing relatively better on this front. According to Aniket Dani, director of research at Crisil Market Intelligence and Analytics, deposits at private sector banks grew at a faster rate compared to credit growth. In a sample of 16 private lenders, 10 posted faster deposit growth as of September 2024. However, only one of 11 public sector banks saw deposit growth outpace credit growth.

“To improve the growth momentum in deposits, public sector banks have increased their fresh term deposits rate by 30 bps between April and September 2024, whereas it was range bound for private players," said Dani.

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The increase in the deposit rates, he added, is expected to hit bank margins negatively and, along with an expectation of higher credit cost due to stress in unsecured lending segments, their profitability is also expected to decline in the current fiscal.

However, some others believe that deposit rates have peaked and, therefore, banks would be able to protect their margins going forward.

Atul Kumar Goel, chief executive of Punjab National Bank, told analysts on 28 October that he does not foresee any further increase in the deposit rates. “So, whatever the guidance for the NIM (net interest margin) of 2.9-3%, I think we will be in a position to maintain it," said Goel.

PNB offers an interest of 6.8% on a one-year deposit, as against 6.6% offered by largest private lender HDFC Bank on deposits of one year to less than 15 months.

Attracting retail deposits

Experts said efforts by PSU banks to garner more deposits can be attributed primarily to two reasons. First, a healthy growth in loans in the past few years has resulted in the CD ratio increasing at a quicker pace. Second, as depositors are getting attracted to the capital markets, banks are seeing greater inflow of wholesale deposits. Attempting to change this and to attract more retail deposits, banks are offering high rates on retail deposits.

“Although the CD ratio for PSU banks is still at about 74%, it is higher than the below-70% levels in the pre-covid period," said Sachin Sachdeva, vice-president, sector head, financial sector ratings, Icra.

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Sachdeva said private banks have been raising deposits at a healthy pace driven by their increasing physical outreach and also by digitally reaching more consumers. “Nevertheless, the preference of depositors for PSU banks remains high. On the other hand, competition has increased from alternate avenues such as equity and debt capital markets, which is forcing banks to keep interest rates high to attract depositors," he said.

Others believe the sharper rise in term deposit rate by PSU banks is primarily targeted at certain deposit maturity buckets to manage asset-liability mismatches.

“While PSBs have experienced significant loan growth in longer tenors, nearly half of their total deposits mature in under a year, creating mismatched tenors," said Agarwal of Gefion Capital.