Extraordinary times call for extraordinary measures. Even as everyone thought that the interest rates have almost bottomed out and the rising inflationary pressure would at least keep the rates where they are, the COVID-19 pandemic globally has changed the monetary policy upside down. The central bankers globally are on a rate cutting spree to save their economy from falling into recession. The Reserve Bank of India (RBI), too, has slashed the repo rate by a massive 75 basis points to 4.40 per cent. This is the rate at which banks borrow from the central bank. The repo rate or the banks borrowing rate from the RBI has a direct implication on the deposit rates. The largest bank in the country, the State Bank of India (SBI), has already cut the savings rate from 3.25 per cent to 3 per cent per annum and fixed deposit rate from 5.50 per cent to 5.0 per cent per annum. Here are five reasons why savers have to brace up for lower deposit rates on their savings and term deposit rates ;
RBI's long term repo window offers cheap money to banks at 4.40 per cent
It's not only the repo rate borrowing tap, the RBI is now providing longer term durable liquidity for three years at a floating rate linked to repo. The central bank has announced releasing up to Rs 1,00,000 crore through long term repo auction. There is already a scramble for pouncing on the cheap money instead of chasing deposits. In the last two months, the RBI has done half a dozen long term repo auction of 1-2 years tenor at a fixed repo rate. Take for instance, the long term repo auction of Rs 25,000 crore a month ago that saw total bids as high as six times the initial amount.
'Don't come to me to park your money,' says RBI
The reverse repo window had earlier provided an avenue for banks to park their surplus funds at 4.90 per cent as against the repo rate of 5.15 per cent. The difference between the repo and reverse repo was always kept at 25 basis points. In March alone, the banks were parking a staggering Rs 3 lakh crore on a daily average basis with the RBI under the reverse repo facility.
The RBI has now widened the repo and reverse repo window by 90 basis points, pushing the reverse repo rate down to 4 per cent. The new reverse repo rate of 4 per cent is not attractive enough to deploy the surplus funds with RBI as the total cost of funds or deposits is higher than the reverse repo rate. Currently, banks' savings rate is around 4 per cent and fixed deposit rates are at over 5 per cent per annum. So why raise deposits aggressively if the money sitting idle won't even cover the cost of funds?
Sudden rise in risk perception in unsecured loans
The banks were happily paying slightly higher deposit rates because of the high growth in unsecured loan segments, which was providing a higher yield. In fact, the high growth in retail banking was backed by the high growth in unsecured loan segments. This high growth was expected to continue, but the COVID-19 outbreak and the lockdown has created a situation of defaults in these loans. The banks are a bit cautious now. They won't need the kind of funds they envisaged earlier to lend to this segment. So many banks would withdraw themselves from offering higher deposit rates.
Lower cash reserve ratio to release huge funds for banks from existing deposit base
The banks were earlier asked to keep 4 per cent of the amount of deposit raised from the market in cash reserve ratio (CRR) with RBI on which it was not earning any interest. The RBI has reduced it by 100 basis points to 3 per cent for a year. This relaxation would release around Rs 1.37 lakh crore for the banking system. The RBI also relaxed the minimum CRR. balance requirement from 90 per cent to 80 per cent. Why raise deposit when you are getting the money back from RBI on existing deposits and the new deposits also provide incrementally higher amounts because of lower CRR?
Focus on collections, recovery as the lockdown ends
The three month moratorium given by the RBI on all term loans will require a huge focus on collections as there are corporate as well as retail borrowers being hit by the disruptions. The corporate sector's cash flows are hugely impacted, while over leveraged retail borrowers would also find it difficult to service their loans. The banks would be focusing on collections and recovery as money locked would only slip the loans into NPAs, which is a big loss, rather than underwriting new loans in these challenging times.