Banks, hit by a liquidity crunch, are raising interest rates on fixed deposits (FDs) to meet credit demand in a move that will also help depositors earn more.
However, high interest rates on FDs also mean that lending rates will not fall significantly in the near future, leading to a not-so-significant boost to savings.
State Bank of India, Punjab National Bank and Karnataka Bank have raised deposit rates by 0.25 percentage points to 125 percentage points while Dena Bank has launched new schemes to raise funds from depositors.
"It is a seasonal feature for banks," said Ananda Bhoumik, senior director, financial institutions, India Rating and Research, a Fitch group company.
"At the end of March, demand for credit from companies is high and bank raise funds at higher cost to meet the high demand for credit. We can not expect significant fall in the lending rates of banks until deposit rates come down."
Banks also raise funds through deposits to bridge the the asset liability mismatch on their books. During the January-March quarter, banks get higher loan demands from companies, which have high orders to complete before the end of the fiscal year.
Banks borrowed close to Rs. 1.6 lakh crore from the Reserve Bank of India (RBI) on Tuesday to meet their liquidity needs, way above the RBI's comfort zone of 1% of total deposits in the system or around Rs. 70,000 crore.
In the first week of March, SBI raised interest rate on fixed deposits of less than Rs. 1 crore for maturity period of 1 year to less than 2 years, 2 years to less than 3 years, 3 years to less than 5 years and 5 years to upto 10 years to 8.75% from 8.5%. Other banks followed suit (see graphic). Dena Bank launched special term deposit scheme offering 9.25% interest for a 750-day term deposit.
"Rising interest rate will have a positive impact on resource mobilisation," said P Jayarama Bhat, managing director and CEO, Karnataka Bank.