Term Deposits Re-Pricing Gearing Pace

Term deposits are a fundamental component of the banking system, allowing individuals and businesses to park their funds and earn interest over a specified period. Recently, the Reserve Bank of India (RBI) provided insights into the evolving landscape of term deposits, shedding light on key trends and the ongoing re-pricing of these deposits. In this blog post, we will explore the RBI's findings and the implications for both banks and depositors.

Key Takeaways from the RBI Report

• Skewed Deposit Mobilisation: The RBI's report highlights that banks have been actively mobilising deposits in the 1-3-year bucket. This trend has been consistent and shows no signs of slowing down.
• Interest Rate Shift: There has been a notable 10%-point increase in deposits offering interest rates in the 7-8% range. This suggests that banks are gradually moving closer to headline deposit rates.
• Individual Contribution: Approximately 50% of overall term deposits are contributed by individual depositors. This share has remained unchanged, emphasising the significance of retail customers in the banking sector.
• Urban Dominance: Urban and metropolitan markets account for a substantial 80% of overall term deposits. This dominance is more pronounced for deposits from non-individual entities.
• Average Ticket Size: The average ticket size of term deposits has exhibited an upward bias. The majority of deposits fall within the range of ₹ 0.1–1.5 million or exceed Rs 10 million.
• Preference for 1-3 Years: The 1-3-year term deposit window has seen the highest share of mobilisation since the early 2000s. This preference is consistent across regions.

The Ongoing Re-Pricing of Deposits

The data from the RBI report indicates that consumers favour placing their deposits in the 1-3-year category. Part of this preference can be attributed to the interest rates offered, with the interest rate differential potentially discouraging consumers from opting for longer-term deposits.
Lenders are also inclined towards this bucket, as the link between deposit rates and loan yields is changing with the introduction of External Benchmark Lending Rate (EBLR)-linked loans. This shift is a reflection of the current interest rate regime, and its implications on bank liabilities are still unfolding.

Incomplete Re-Pricing

Despite the ongoing re-pricing of term deposits, it appears that the process is far from complete. The report suggests that the cost of deposits may still increase, potentially leading to a negative impact on net interest margins (NIM) in the near term.
With a significant portion of the deposit book contracted at 7-8% interest rates, while most of the deposits fall within the 1-3-year window, it is reasonable to assume that lenders may experience a 30–40 basis point increase in the cost of funds. Some of this increase can be mitigated through the Marginal Cost of Funds-Based Lending Rate (MCLR) portfolio, where re-pricing is still underway.

Banking Landscape and Advantage

Public banks may have a slight advantage in defending their NIM at levels close to the current ones, as compared to private banks. The ability to navigate the re-pricing of deposits and manage NIM effectively will be crucial for banks to maintain profitability.
It's vital to note that HDFC Bank's merger with its parent company will continue to play a significant role in understanding the deposit rate landscape for all banks.

Conclusion

The RBI's report on term deposits provides valuable insights into the evolving financial landscape in India's banking sector. The ongoing re-pricing of term deposits underscores the dynamic nature of the banking industry, where interest rates, customer preferences, and economic conditions continually influence deposit mobilisation and profitability.
For depositors, these developments may impact the returns on their term deposits, while banks need to carefully manage their NIM amidst changing deposit rates. As we move forward, monitoring the progress of this re-pricing and its broader economic implications will remain essential for all stakeholders in the financial sector.