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

Synopsis
With interest rates declining, banks face the challenge of attracting deposits. Experts suggest innovative products like fixed deposit-linked credit cards and sweep-in deposits are crucial. Younger savers are shifting to capital market products, while senior citizens favour government schemes. Banks are already adapting, but further rate cuts will necessitate more competitive offerings to retain depositors.
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%.
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.
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.
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