Banks may resort to floating interest rates on deposits in order to match the pricing of loans with the new rule of using external benchmark to determine the rates.
While banks do offer certain floating interest rate options on deposits, it is not yet prevalent in the market.
From April 2019, the Reserve Bank of India (RBI) has directed banks to link lending rates to external benchmark rates. They can be linked to the repo rate, yield on the government’s 91-day treasury bill (T-bill), the yield on the government’s 182-day treasury bill or any other benchmark market interest rate produced by the Financial Benchmarks India (FBIL).
This is a shift from internal benchmarks which relate to cost of funds of banks to align the interest rates with broader market rates by more pass-through of the central bank’s policy rates to customers.
This would require banks to further their focus on the liability business, which is more inclined towards a fixed rate regime.
“Over time we need to see if we can have floating deposit rates and if we can link them to an external benchmark. We have tried in the past but did not find much takers and RBI does not stop us. But we will have to examine this,” said PK Gupta, Managing Director – Retail and Digital banking at State Bank of India (SBI).
Gupta said this is just at an examination stage and could be discussed within the banking industry going forward.
VG Kannan, CEO of Indian Banks’ Association (IBA) said the system already exists. “RBI allows banks to charge floating rates on deposits and it is prevalent in the market but there are no takers and appetite for it. Would you and I prefer a floating rate? No. However, if it is made mandatory, it might have to be followed,” he said.
An analyst said the pricing mix and tenure of deposits may have to be looked at to ensure the margins are covered given the volatility in the lending rates set to rise and therefore the risks on interest rates will be required to be hedged.
Currently, the fixed rates on deposits along with floating lending rates may pinch banks’ net interest margins, the business earned on the margin or spreads in the lending rates.
“Such a move could imply a regime change in interest rate structure in India with a switchover to a real-time flexible system. However, such a move may also imply a floating interest rate structure of deposits, otherwise, there would be significant ALM (asset-liability management) mismatch for the banks. In a developing country like India that has a limited social security system in place, this could be self-defeating,” said Soumya Kanti Ghosh, group adviser to SBI.
Will depositors agree?
Experts suggest this idea may not find takers among depositors and the government could resist a change so huge too soon.
“In our country, it may not work but eventually if it is imposed by all the banks, then customers will have no choice. But it will not be a reality any time soon,” said Sukanya Kumar, Founder of RetailLending.com, a home loan advisory firm.
According to her, if deposit rates become floating rates, then what will happen to the retired or senior citizens. We also will slowly move towards the Amercian banking system which has much lower deposit rates. But for now, even the government may not agree to such a system given the extent of banking penetration in India.”
Atul Dedhiya, a 32-year old professional says it would be unfair to the depositors as there would be no reason to park his cash in banks.
“I keep my liquid cash in banks to earn interest. Given the inflation and tax rates, we anyway do not earn much on fixed deposit rates. There would not be any incentive for me to keep my money in banks,” he said.
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