The decision of the Reserve Bank of India (RBI) to increase the limit of mass deposits for scheduled commercial banks and small finance banks (SFB) from Rs 2 crore to Rs 3 crore may result in deposit accretion, according to analysts and industry experts.
High-net-worth and ultra-high-net-worth individuals typically use bulk deposits for brief periods. Banks offer interest rates of approximately 5–6 per cent on mass deposits that are held for 7–45 days.
Bulk deposits for these institutions were previously defined as Rs 2 crore in an October notification from the central bank.
A senior private banker emphasised that the impact is lessened as a result of the revision of rates and more so because the target audience of bulk deposits is at ease with the current situation. “The revision may result in some accretion, but it is not anticipated to be significant,” the banker stated.
Sanjay Agarwal, the managing director (CEO) and managing director (MD), stated that the action will provide banks with additional flexibility to mobilise these deposits. “The upward revision of the bulk deposit threshold from Rs 2 crore to Rs 3 crore and above is a pragmatic and welcome measure that will allow banks to mobilise granular retail deposits with greater ease,” Agarwal stated.
Similar to this, analysts also predicted that banks may experience a temporary increase in bulk deposits.
Ajay Kanwal, MD & CEO of Jana Small Finance Bank, also stated that the revision of the deposit limit may result in a slight increase in the cost of funds, but this will be advantageous to the banks. Kanwal stated, “We anticipate a decrease in the cost of funds, even though there have been few changes.”
The decision of the Reserve Bank of India
The central bank stated that the decision to modify the bulk deposit limit was the outcome of a review of the bulk deposits of institutions. As part of a review of banks’ bulk deposit limits, RBI Governor Shaktikanta Das suggested in his June 7 statement that bulk deposits should no longer be limited to single-rupee term deposits of Rs 3 crore or more for scheduled commercial banks and SFBs but should also include regional rural banks.
Das also established the aggregate deposit limit for regional rural banks (RRBs) as single rupee term deposits of Rs 1 crore or more.
For instance, the website of the banks revealed that the State Bank of India (SBI) offers an interest rate of 3.5 percent to 6.5 percent on deposits with tenures ranging from 7 days to 10 years. ICICI Bank offers an interest rate ranging from 3 percent to 6.9 percent during the same time frame. Axis Bank offers an interest rate of 3 percent to 7 percent for the same period, while Bank of Baroda offers an interest rate of 4.25 percent to 6.5 percent.
Banks’ deposits
Deposit growth has been surpassing credit growth in certain banks’ quarterly reports for January-March FY24. The total deposits of HDFC Bank were Rs 23.79 lakh crore at the end of the quarter on March 31, 2024, and they increased by 7.5 percent quarter over quarter (QoQ).
Compared to a 19 percent increase in credit growth year-over-year, RBL Bank reported a 22 percent increase in deposits. YoY deposit growth at YES Bank was 22.5 percent, while credit growth was 14.1 percent.
Additionally, the CareEdge report indicates that the CD ratio of banks has decreased for the time being, but it may increase in FY25.
In April 2024, ratings agency Care Edge reported that the credit-deposit (CD) ratio of banks has decreased by 120 basis points to 79.1 percent for the fortnight ending on April 5, 2024, after reaching a decadal high in March 2024.
“Since September 2023, the CD ratio has been consistently maintained at approximately 80 percent.” In comparison to the previous fortnight, it experienced a 120 basis point decrease and was at 79.1 percent for the fortnight ending on April 5, 2024. This decline was primarily due to the robust sequential growth in deposits. According to the report, the primary factor contributing to this expansion is the merger between HDFC and HDFC Bank.
The CD ratio indicates the extent to which the funds that banks have collected as deposits have been disbursed. A high CD ratio is indicative of the credit and liquidity risks that banks face.
In January 2024, certain media outlets reported that the Reserve Bank of India (RBI) expressed dissatisfaction with the high CD ratio in the banking sector. Furthermore, Sanjay Agarwal, Senior Director of CareEdge, had previously informed Moneycontrol that the regulator has been requesting a more reasonable CD ratio number. “We have observed that the credit growth of Indian banks has been more rapid than their deposit growth.” “This has ultimately resulted in a high CD ratio,” Agarwal stated.