Term deposits in the banking sector are undergoing a significant re-pricing process with banks directing their efforts towards deposit mobilization primarily in the 1-3-year maturity bucket.
The 1-3-year maturity bucket remains the preferred choice for mobilising term deposits. This preference is at its highest level since around 2000 and is consistent across various regions, according to RBI data.
“With 35-40% of the book contracted at 7-8% while most of the book is in the 1-3-year window, we would probably have to make an assumption, keeping other variables unchanged, that the lenders are likely to see 30-40 bps increase in the cost of funds from current levels. Some of this increase can be cushioned through the MCLR portfolio where the re-pricing is still underway,” according to a Kotak Institutional Equities report.
There has been a substantial 10% increase in deposits falling within the 7-8% interest rate bucket, which suggests that the banking industry is moving closer to aligning with headline deposit rates. However, the complete re-pricing of term deposits across the banking system is still a work in progress.
The first quarter of the fiscal year 2024 has witnessed an increase in deposits that offer higher interest rates.
Key takeaways
Approximately 50% of the total term deposits still come from individual depositors, and this percentage remains unchanged when compared to the previous quarter.
Urban and metropolitan markets continue to dominate the landscape, accounting for a significant 80% share of the total term deposits. Non-individual entities contribute more to this share.
There’s a noticeable upward trend in the average ticket size of term deposits. A substantial 80% of these deposits fall into two categories: those ranging from Rs 1-15 lakh and those exceeding Rs 1 crore
While these developments indicate a shift in deposit dynamics, the re-pricing of term deposits remains an ongoing process.
The re-pricing of deposits may have implications for banks’ net interest margins, and it is expected that the cost of deposits will continue to increase. Public banks may have a slight advantage in defending their margins compared to private banks, and ongoing developments, such as HDFC Bank’s merger with its parent, will play a significant role in shaping the deposit rate landscape for all banks.
