One-year fixed deposits begin to offer double-digit returns again

After more than three years, banks are once again offering double-digit returns on fixed deposits (FDs) of one-year duration. Lakshmi Vilas Bank, a small, south-based lender, has increased the interest rate on one-year-and-one-day deposits by a whopping 110 basis points (bps) — 100 basis points make a percentage point — to 10.10% from Saturday.

It’s not alone. The IDBI Bank is set to hike deposit rates across various maturities by 25-100 bps from Tuesday. This would be the bank’s second hike in the current quarter. Last week, the Union Bank of India, Kotak Mahindra Bank and Dhanlaxmi Bank too had hiked deposit rates in certain maturity buckets.

The Union Bank of India revised its interest rates on term deposits by up to 150 bps on certain maturities; Kotak Mahindra Bank increased its interest rates on deposits by up to 50 bps depending on maturities in both its baskets —- one under Rs15 lakh and the other in the Rs15 lakh to Rs1 crore range, while the Dhanlaxmi Bank announced a 25-50 bps increase on its term deposit rates across select maturities.

“During the pre-crisis era, banks were offering 10.50% for one-year fixed deposits. We would not see those levels in the near term, but smaller banks like Lakshmi Vilas will offer double digits, though larger ones will offer 50-100 bps less,” said Vaibhav Agrawal, vice-president (research), Angel Broking.

With deposits not growing as fast as loans, banks are scrambling to raise funds to fill the breach. Deposit growth on a year-on-year basis languished at 16.44% for the fortnight ended January 14, well behind the Reserve Bank of India’s target of 18% for the current fiscal.

To boot, RK Bansal, IDBI Bank’s executive director, doesn’t rule out the possibility of a third hike in FD rates “as inflation is still not under control” and deposit growth lags growth in credit. Banks have already raised deposit rates across various maturities by around 200 bps in the current fiscal. As a result, their net interest margins, or NIMs, are likely to contract.

NIM is the difference between interest earned and interest paid as a percentage of the bank’s assets in a given period.

A report by rating agency Fitch Ratings, earlier this month said NIMs are expected to narrow in 2011 as interest rates rise and banks are forced to raise deposit rates to manage liquidity.

“While banks have the contractual ability to pass such hikes on to borrowers, they may prefer to absorb some of this increase at the cost of NIMs in the face of competition,” the report said.

Bank                           Recent hike in FD rates
Lakshmi Vilas Bank      Up to 175 bps
IDBI Bank                       Up to 100 bps
Union Bank of India       Up to 150 bps
Kotak Mahindra Bank   Up to 50 bps
Dhanlaxmi Bank            Up to 50 bps