Why are banks cutting interest on deposits?
Moneylife Digital Team 05 December 2014

When RBI increases rate, banks immediately jump to increase lending rates. However, when there is no change in RBI’s policy for the past 12 months, why banks are regularly reducing interest rates on deposits, the most important source of income for most financial consumers?


In yet another example of cartelisation, three leading banks in India have cut interest rates on term deposits that too when there is no change in the monetary policy rates for the past 12 months. Last time, the Reserve Bank of India (RBI) increased interest rate in December 2013. It has remained at 8% since then. Even earlier this week the central bank kept all key rates unchanged in its fifth bi-monthly policy. When there is no change in monetary policy rate, why banks are cutting interest rates on deposits? Since they are not cutting rates for lending, why depositors are being ‘penalised’ as happens each time? 


Last month, State Bank of India (SBI), the country's largest lender, announced a steep 1% cut for short-term deposits up to Rs1 crore maturing in seven to 45 days to 5%. In the September quarter, SBI reduced rates thrice, twice in September alone, on retail deposits. As if this was not enough, the state-run lender on Friday cut interest rates on long-term deposits by 0.25%.


SBI said that the interest rates for deposits of one year and above would be reduced by 25 basis points or 0.25% per annum. While the rates for deposits of one year to less than three years and three years to less than five years are reduced from 8.75% to 8.50%, for deposits of five years and above, the new rate would be 8.25% against 8.5% at present.  


When the state-run lender takes lead in cutting interest rates, why should private banks not follow the suit? Few days back, ICICI Bank, the largest private sector lender, cut its deposit rate offering in the 390-days to two-year buckets by 0.25% to 8.75%, according to its website. HDFC Bank too, cut its retail deposit rates by 0.25%-0.50% in the 46-days to under-one year bucket.


Banks are citing easy liquidity and slow credit offtake as main reasons for cutting interest rates on deposits. According to media reports, the reduction has been due to deposit growth outpacing credit growth, a drop in the money market rates and aligning with the competition, which has already cut the rates.


However, this is nothing but blatant misuse by banks of floating rate policies and 'free hand regime' allowed by the RBI. When interest rates rise, banks immediately step in to increase their spread, but fail to pass on the benefits to customers when the situation is reversed.


At the post-policy press conference, governor Dr Raghuram Rajan had expressed concern that the RBI measures are not getting transmitted into rate corrections at banks but said that he is not asking the banks to do the review.


Over the past year, RBI has repeatedly exhorted banks to treat customers fairly (TCF) through various public statements, meetings and circulars. However, this is clearly not enough. While moral suasion may have worked in a closed economy, the freedom to fix charges and the formation of an informal pricing cartel through the Indian Bank’s Association (IBA) seems to have weakened RBI’s ability to compel good behaviour.


As on 5 December 2014 savings deposit rate of five major banks was 4.00%, while base rate for lending was between 10.00% and 10.25%. No bank lends money on the base rate and charge 1.00% and above interest over and above the base rate. Even at the base rate level, this shows a spread of 6.00% to 6.25% between interest paid to customers on savings account and interest charged by banks on advances and loans. This spread is enough for banks to cover all basic cost for providing services, like ATMs, SMS Alerts and cheque books to customers. Instead, banks have been allowed to charge based on the claims of the IBA without even having to justify costs.


According to data from RBI, during 2010-11, base rate for lending was 8.25% to 9.50%, while savers were paid in interest of 3.50% on savings bank account. The interest rate for term deposit (one-three years) was 8.25% to 9.00%. Over the next four years, while lending rates gone up, the deposit rates increased marginally. For 2014-15, the base rate is 10.00% to 10.25% and the term deposit rate is 8.75% to 9.05%. Interest on savings deposit also remained static at 4% since 2011-12.







Deposit Rates*



Term Deposits

1-3 yrs

3-5 yrs

Above 5 yrs




































(Source: RBI)


If at all banks have more liquidity and credit offtake is slower, why the lenders are not lending more or even thinking about reducing interest rate to attract more borrowers? This is not likely to happen. Because, banks, under the leadership of IBA appear to be more interested in fleecing customers under different charges. One look at banks’ balance sheet would reveal how much they earning from other and other fee based income, rather than from interest earned.


One point here. Is the same logic of ‘more liquidity and low credit offtake’ responsible for banks’ lethargic approach to recover big dues or non-performing assets from large borrowers?


Last month, speaking at the third Dr Verghese Kurien Memorial Lecture at IRMA, Anand in Gujarat, Dr Rajan, of the RBI, had said, "In fact, the system renders the banker helpless vis-a-vis the large and influential promoter. Who pays for this one way bet large promoters enjoy? Clearly, the hard working savers and taxpayers of this country! As just one measure, the total write-offs of loans made by the commercial banks in the last five years are Rs1.61 lakh crore, which is 1.27% of GDP. Of course, some of this amount will be recovered, but given the size of stressed assets in the system, there will be more write-offs to come. To put these amounts in perspective - thousands of crore often become meaningless to the lay person - 1.27% of GDP would have allowed 1.5 million of the poorest children to get a full university degree from the top private universities in the country, all expenses paid."


According to the RBI governor, the amount recovered from cases decided in 2013-14 under Debts Recovery Tribunals (DRTs) was just Rs30,590 crore or 13% while the outstanding value of debt sought to be recovered was a huge at Rs2.37 lakh crore.    


Commenting on the monetary policy, Arundhati Bhattacharya, chairperson of State bank of India, said, “The RBI assertion of a possible change in monetary policy stance next year is a clear vindication and acknowledgement of a benign inflation regime. In fact, by advancing the inflation target of 6% to March 2015, RBI has now set out a clear message of the reversal of the rate cycle, sooner than later. With oil prices at historic lows, a stable exchange rate and strong capital inflows, the feel good factor is here to stay.”


Well, if the feel good factor is here to stay, then why savers are being punished?

Ralph Rau
8 years ago
Public Sector banks have alarming levels of bad debts, money which has gone into the pockets of the business class at the expense of the common saver.

Indian savers have for been earning negative real rates versus inflation for too long.

Inflation has got embedded in India due to high inflationary expectations, supply demand imbalances, poor infrastructure, erratic food production.

Governments efforts to fix these issues will take a couple of years.

Savers must earn positive real rates else savings will wane. Poor capital formation means the cycle of growth will be deprived of internal fuel and will continue to be dependent on foreign funds - about which there is no certainty especially if US growth continues to attract global investors.
Salvadesswaran Srinivasan
8 years ago
This is why I do not have any fixed or recurring deposits with large banks, although I have a 11% RD with a co-op bank. Smaller private banks offer higher interest on my deposits and have much better customer service as well.
Sucheta Dalal
Replied to Salvadesswaran Srinivasan comment 8 years ago

Cooperative banks are far more dangerous. They have dual regulation and fail with regularity. Only Rs one lakh of your deposits will be insured if something goes wrong.

I would strongly urge you to read Moneylife articles -- google coop bank. Also watch our videos on safe and smart investment. You can start with the latest video of our Open House with Dr Chakrabarty. http://foundation.moneylife.in is the link to Moneylife Foundation's website. Please look under Events.
8 years ago
Savers should be incentivised by paying more interest. On one hand, they want to increase savings in financial instruments to avoid investing (???) in gold and on the other hand, investing in savings gives back just 4%...... Ironical...
Naveensirigiri Reddy
8 years ago
who will consider the demand deposit rates for arriving at net interest margin,ur just considering savings deposit interest rtaes.In a time where psbanks are struggling for existence you had write this amateur article.
Replied to Naveensirigiri Reddy comment 8 years ago
PSU banks are struggling due to the crony capitalism prevailing in India. Politicians run the PSUs. What else can we expect from them? But, the fact is that defaulters enjoy their lives after creating NPAs and the poor savers are paid just 4%.......
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