Amid increasing competition for deposit growth, financial institutions are luring customers by offering attractive rates on select fixed deposit terms. This comes as time deposits regain popularity as a preferred investment option after recent tax changes to other debt instruments.
In March 2023, deposit rates rose faster than lending rates. The Weighted Average Lending Rate (WALR) on new rupee loans rose 8 bps to 9.3%, while the Weighted Average Rate on Domestic Term Deposits (WADTDR) ) increased 23 bp, up to 6.5 %.
“As banks continue to focus on deposits more intensely, we are seeing a steeper rise in deposit rates and this has clearly been driven by rising rates on new deposits,” CareEdge Research said in a recent note.
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Fresh deposit rates for PSU banks increased by 18bp, and for private banks by 17bp, with March 2023 levels surpassing their pre-pandemic levels, according to RBI data.
While most commercial banks offer rates of up to eight percent, Small Finance Banks (SFBs) and NBFCs offer rates of up to nine percent due to their smaller book sizes and more deposit requirements. granular retailers.
Line of business in December 2022 it first reported that SFB deposit rates had touched their introductory levels of 8-9 percent seen when most of these banks began operations in 2016-17.
Now several big NBFC players such as Bajaj Finance, Mahindra Finance and Shriram Finance are also offering FD rates of 7.50-8.50 percent, higher or on par with mid-sized private banks.
Rates are higher on deposits with a tenure of 2-3 years, reaching a maximum of 5 years in some cases. This is also due in large part to lenders’ asset liability management (ALM) requirements, as most of today’s lending is to retail borrowers, where the average loan duration is from 1 to 3 years.
The rate hikes come at an opportune time for investors, as fixed-term or term deposits have regained favor following changes in the budget tax for debt mutual funds that equalized all fixed-income instruments from a tax perspective. R Baskar Babu, MD and CEO of Suryoday Small Finance Bank, which raised some FD rates on Friday, said the higher rate offer is for a limited period until May 30, to further increase the bank’s liabilities. This will help reduce the bank’s credit-to-deposit ratio from 120 percent to around 110 percent.
“We have finally seen the transmission of rate increases which are reflected in deposit rates with rates nearing maximum, so now is the best time to lock interest rate higher through FD,” said Manavi Prabhu, Head -Fixed Income, Anand Rathi Shares and Stock. runners.
“Investors can also look to bank FD alternatives through bonds and FD issued by blue chips or large AAA-rated NBFCs and HFCs for a longer investment horizon as part of their asset allocation to fixed income,” Prabhu added. .