Banks that have so far been shortening their bond holdings to lend may have to settle on their bumper profits from the previous quarter, when they did not pass on higher rates to depositors while they charged borrowers.
Small savings deposits of Rs 9.9 lakh crore in February ’22 are a tiny fraction of the total SCB deposits which stand at Rs 170.2 lakh crore. But the ratio of small savings deposits to commercial Bank deposits has increased from 4.4 percent to 5.8 percent in the last five years, shows a research Bank Of Baroda,
Bankers have often complained that the interest rates administered on small savings schemes are a hindrance in reducing interest rates by more than a limit. But commercial bank deposit rates have dropped below the small savings rate since the pandemic, making the latter savings rate more attractive.
Although interest rates were softening in March 2020 at the time of the pandemic-induced lockdown, banks reduced deposit rates by a further 135 basis points between March 2020 and April 2022. reserve Bank of India slashed benchmark policy rates by 115 basis points to revive the economy derailed due to the pandemic-induced nationwide lockdown.
But they later increased their deposit rates on fixed deposits by only 35 bps even after the rate hike by the Reserve Bank by 175 bps, shows the weighted average fixed deposit rates data on outstanding deposits released by the Reserve Bank. The government has recently raised interest rates for small savings schemes in the range of 10-30 bps. Now even one year bank fixed deposits fetch a lower rate of interest as compared to the respective small savings instruments.
“It is observed that bank deposits still dominate as the preferred option of savings based on the manifest preference of consumers. But the last few years have seen a very gradual though slight change, with the share of small savings increasing.” Aditi GuptaEconomist, Bank of Baroda. This issue assumes special significance in the current scenario when banks are trying to raise funds to meet the rising credit demand. Banks cannot afford to lose these funds and may have to increase deposit rates further to attract customers.
But a study by Bank of Baroda says that banks continue to be the preferred choice for consumers as compared to small savings schemes. “So relatively, small savings rates haven’t really come that high against deposits over the years, and now, the transmission is really faster in fixed deposits than small savings,” said Rahul Bajoria, chief India economist at Barclays Capital. The savings amount gets locked in for a longer period, slowing down the movement in either direction.
However, small savings have an advantage over margins offering higher rates as these are only periodically adjusted and linked to market rates. Often in declining cycles, the government chooses not to reduce their rates which makes them attractive to households.