As deposit rates fall, banks turn to innovation to woo savers and stay competitive

Mumbai: Banks will have to innovate to get fresh deposits as lower interest rates will make it more difficult to attract new savers, said investment experts. Products such as fixed deposit-linked credit cards, sweep-in deposits and savings bank-linked home loans will have to be marketed more as younger savers will continue to move towards capital market products like short-term debt funds, while senior citizens will be increasingly more dependent on government savings schemes, said bankers and investment advisors.

To be sure, banks already have products such as those with a monthly sweep-in to fixed deposits, home loans which take into account surplus balance in savings accounts and credit cards backed by fixed deposits.

Adhil Shetty, CEO of Bankbazaar.com, an online financial marketplace, said banks have already taken the initiative. "We are seeing different kinds of products and with different kinds of banks also; rates wary. Like small finance banks offer a higher rate compared to the top commercial banks," he said.


With the deeper repo rate cut and liquidity likely to be released by the 1 percentage point cash reserve ratio cut, the fall in deposit rates will quicken, Shetty said.

The one-year fixed deposit rate offered by State Bank of India is likely to decline close to 6% from the current 6.5%.

Some lenders like ICICI Bank have started reducing their bulk deposit rates. Retail deposits less than ₹3 crore will also be cut in the coming week, even as banks have already passed on the cut to their retail lending rate. Bank of Baroda, for example, will announce its revised deposit rates later this week. Ashok Chandra, CEO of Punjab National Bank, said the bank has initiated calculations on the quantum of deposit rate cuts which will be announced as per schedule on June 30.

Deposit rates had fallen after the sharp rate cut in the Covid-19-affected 2020 and 2021. Bankers said while it cannot be predicted how low rates will go, it is right to say that depositors will have to live with lower rates.

"With repo at 5.5% and ample liquidity in the system, it is fair to assume overnight rates at 5.25% which means one-year deposit rates cannot go above 6%. Savers who want a higher rate will have to most probably park their funds in riskier assets," said Rajiv Anand, deputy managing director, Axis Bank. "With money market rates coming down, the returns on mutual fund debt investments will also adjust. So depositors will have to adjust to a lower rate environment. The bet from the central bank's perspective is people will spend more, buy homes, cars and use their credit cards which will give the economy a push."

For senior citizens, who need the security of their principal and also want a higher interest rate, the senior citizen savings scheme offering 8.2% currently is an option. But the scheme has a lock-in for five years and entails withdrawal penalties if money is taken out prematurely. Post office savings currently offer 6.9% for a one-year deposit, though those rates may also be revised after the rate cut.

Shetty said debt mutual funds are a good choice for all investors since they are both tax-efficient and liquid, especially when rates are on the way down.