Customers switching deposit plans

Nandini Goswami & Joel Rebello

KOLKATA/MUMBAI: With interest rates moving up substantially, banks are experiencing a significant churn from lower cost fixed deposits (FDs) to higher cost ones as customers try to up returns while the going is good.

Thanks to the resource crunch, bankers are not protesting too much. In fact, “premature discounting” of old deposits and switching over to new rates has never been as easy as banks get ready to go the extra mile in order to prop up their retail deposit bases. “Banks have been very busy in raising deposits. There is no dearth of liquidity in the market, which is estimated at Rs 22,000-25,000 crore. The volume of deposits is bound to go up”, AC Mahajan, CMD, Allahabad Bank, told DNA Money.

But banking sources feel that the apparent growth in deposits has less to do with the opening of many new retail accounts and more to do with the increase in bulk deposits.
As far as retail deposits go, the trend is for a switch from old FDs to new ones with higher rates. “A large section of customers with sufficient time left for the previous FDs to
mature are approaching the bank to switch over to an average 9% rate from, say, 6.25% earlier.

Most new accounts are mainly for larger bulk deposits”, a bank official said.

Given the gap between old rates and new, even the 1% penalty charged for premature closure of old FDs has not deterred customers. Bankers say that increased awareness among customers regarding deposit rates, wider choice and cut-throat competition among banks to garner deposits has resulted in customers making smarter choices on fixed deposits than before.

“Customer awareness has definitely increased as people are now choosing wisely. There are some instances where people break their deposits after calculating the costs; but another trend is that people are revisiting their auto renewal options for deposits,” says Subrat Pani, deputy general manager, ICICI Bank.

Bankers from IDBI Bank and State Bank of India confirmed that customers were switching to higher yielding deposits despite the penalty. “It is natural. Just about a year ago
the rates were 6% and now they are as high as 9-10%. And though there is a provision, according to RBI rules, to waive the penalty if a bank wants to, we are not actively pursuing it,” said an official from SBI.

Aggressive outdoor advertising from banks has also attracted many customers to take a relook at their deposit rates and tenures, bankers said.

“It is not just that banks want to attract funds, but there is also competition among them to hold on to their current customers because, if one or two banks raise deposit rates and advertise it in a big way, then the customer will be attracted to them and no bank wants to lose customers,” Pani from ICICI Bank said.

Thanks to this new-found aggression on deposit rates, the banking system is slowly closing the gap between credit growth and deposit growth. Last year, deposits were growing at 16.9% against credit growth of 31.9%. This year, as on February 23, credit growth was down to 29.3% but deposit growth had risen to 24.5%.

The attractive rates offered by banks stems partly from the need to manage the balance-sheet as the year-end approaches. Moreover, with a large section of public sector banks having diluted a significant part of their statutory liquidity ratio (SLR) holding, there is not much headroom available over and above the mandatory 25% limit.  Hence the rush for deposits at any cost.