Banks could face asset-liability mismatch risk due to the concentration of short-term deposits but longer loan tenures.
Banks have a concentration of deposits in the 1-3 year maturity bucket, but most retail loans typically have a longer duration, exceeding 3 years.
Term deposits with a maturity of “one year and above but less than 3 years” witnessed substantial growth in FY23, driven by the attractive interest rates offered by banks. Bank depositors appear to have shifted their term deposits from other maturity buckets to the “one year and above but less than 3 years” category, attracted by the higher interest rates offered. They also moved some of their balances from savings accounts to this specific term deposit tenor.
As a result, the share of deposits in this tenor increased to 64% of the total outstanding term deposits as of March-end 2023, compared to 50.5% at March-end 2022.
According to data from the Reserve Bank of India, term deposits in scheduled commercial banks (SCBs) grew by 13.50% year-on-year (YoY) to ₹97.60 lakh crore as of March-end 2023.
Why short–term deposits are popular
Several factors have contributed to this trend. Firstly, the parking of funds is influenced by interest rates and expectations, with banks offering higher rates in the 1-3 year maturity buckets. Secondly, senior citizens tend to invest in the tenor with the highest interest rate, as they often rely solely on interest income and have lower risk tolerance. Lastly, the shift from savings accounts has primarily occurred in the 1-3 year buckets, as these funds are not locked up indefinitely.
The term movement
The proportion of term deposits in the “five years and above” category decreased to 8.5% of total outstanding term deposits as of March-end 2023, compared to 11% at March-end 2022.
The proportion of term deposits in the “3 years and above but less than 5 years” category remained relatively stable at 7.5% of total outstanding term deposits as of both March-end 2023 and March-end 2022.
The proportion of term deposits in the “less than one year” category declined to 20% of total outstanding term deposits as of March-end 2023, down from 31% at March-end 2022.
The State Bank of India currently offers the highest interest rate of 7% on retail domestic term deposits (below Rs 2 crore) in the “2 years to less than 3 years” category, followed by 6.80% on “1 Year to less than 2 years.” Interest rates in all other deposit tenors are lower.
In response to the 250 basis points (bps) increase in the policy repo rate since May 2022, the weighted average domestic term deposit rates (WADTDR) on fresh and outstanding deposits rose by 245 bps and 113 bps, respectively, during the May 2022-March 2023 period.
