Demonetisation has bought massive cash to banks, and they honestly don’t seem to need the deposits. As of yesterday Rs 8.44 Trillion was collected in banks as cash about about 6 trillion as deposits. With RBI taking out 3 trillion by increasing the CRR level, banks are still fairly heavy on cash.
So What they Do?
The banks ideally when they have high deposits, they tend to deposit with RBI at a cheaper rate. A bank gives 4% on savings account for customers, but when it deposits with RBI it roughly earns an interest of 6%. The extra premium of 2% is welcome but minuscule. (Refer our previous posts for in detail analysis).
Then, because they’re so much cash in the system, banks lower deposit rates. And then, they tend to lower lending rates too, to push demand up.
What are banks doing?
Banks have followed the first two rules of thumb piously i.e to deposit the excess cash with RBI and to reduce fixed deposit rates. When it comes to third rule of thumb to reduce the interest rate on loans, they are reluctant.
In early December, 31 out of 34 Scheduled Commercial Banks have reduced deposit rates, but only 15 out of 34 banks have reduced their interest rate on loans. The loan rate reduction has been disproportionate with deposit rate decrease. This strategy provides banks an higher interest margin. Our below image says it all.
When RBI has been repeatedly telling to pass on the rate cut benefits to customers, Banks have been taking it in only one way: Cut Deposit Rates!
- IDFC Bank gives highest interest rate on deposits (for 1 year term) of 8.25%.
- Vijaya Bank, Maharashtra Bank, Indian Bank, Kotak Mahindra and United Bank of India has the lowest interest rate on deposits – 6.75% Per Annum.
- SBI and HDFC have cheapest loans with 1 year MCLR at 8.90% P.A
- City Union Bank has the costliest loan rate with 1 Year MCLR at 9.75%
- IDFC, United Bank of India and Indian Overseas bank are the only banks which have not gone for reduction in deposit rates.
- City Union Bank, State Bank of Mysore and Maharashtra Bank have cut the deposit rates to the tune of 75,65 and 55 basis point respectively. But their was no reduction of interest rate on 1 year MCLR rate for these banks.
As a follow-up note on MCLR (Marginal Cost of funds based Lending Rate) and how it is changing the way banks lend in India, we are publishing the rates of 34 SCBs(Scheduled Commercial Banks) as on November, 2016. According to RBI’s mandate, Banks have to review and publish their MCLRs each month.
Please click here to check our previous update on MCLR Rates for October 2016.
We have created a MCLR Bank Base Rate Tracker, where the rates of 34 major banks are presented. The rates include:
- Base Rate;
- MCLR (of varying tenors);
- Deposit Rate (for amounts less than Rs. 1 cr., between 1 and 2 years)
Note: Why don’t banks like to cut MCLR/Base Rates?
Most loans by banks are floating rate loans, linked to MCLR or the base rate. If banks cut the MCLR, not only do new borrowers get benefited, even current borrowers see their rates cut. Bankers hate that – because cutting deposit rates only cuts them for new depositors, not existing ones. But lending rates require to be cut in order for banks to get new borrowers, so at some point they will need to bite the bullet.