Union Finance Minister Nirmala Sitharaman, earlier this month, urged banks to create innovative deposit products to attract customers amid concerns over a “mismatch” in credit-to-deposit (CD) ratio. The appeal comes as banks were found to be lending more than they receive in deposits, potentially leading to liquidity problems and impacting the Reserve Bank of India’s (RBI) ability to meet cash requirements. Currently, the ratio is at 0.79 per cent, higher than its historical average of 0.75 per cent, according to a report published by 360 ONE Asset Management Ltd, a Mumbai-based AMC. However, in its last MPC meeting, RBI said there is no immediate concern but stressed that if the current trend continues, the banks’ liquidity can enter the red zone. Following this red flag, Suryoday SFB, on August 27, revealed plans to launch a fixed deposit (FD) scheme with over a 20-year tenor. Currently, the average tenor is up to 10 years. This new product will incorporate a systematic withdrawal plan halfway into the tenor.

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The credit-to-deposit ratio is a financial metric that measures the proportion of a bank’s loans to deposits. A high C/D ratio can indicate banks may struggle to fund loans, especially during economic downturns or financial stress. Hence, banks can offer higher interest rates on savings accounts, innovative FD schemes, flexible recurring deposit schemes, etc., to attract deposits from potential customers across the spectrum, including senior citizens.

RBI’s View On The Situation

During the August MPC meeting, RBI urged banks to attract household financial savings through innovative products, as alternative investment avenues are becoming more attractive to retail customers. The main concern stems from rapid growth in home equity loans and certain segments of personal loans despite pre-emptive regulatory measures announced by RBI in November 2023. To meet this credit demand, banks are relying more on non-retail deposits, potentially exposing the banking system to structural liquidity issues. Although a bit late, banks have responded by raising term deposit rates and mobilising funds via higher CD issuances, almost double what they issued last year, to address the issue.

Suryoday SFB’s 20-Year FD

Baskar Babu, MD & CEO of Suryoday SFB, said the proposed FD product is intended for customers with long-term savings goals and those seeking to leverage the benefit of compounding interest rates over an extended period. The bank is currently assessing the interest rate risk and other factors related to the product.

As per a Business Line report, the interest rate for this FD product could be linked to the 10-year benchmark G-Sec. Currently, the yield for this security is 6.85 per cent.

Additionally, the State Bank of India (SBI) is the only bank currently offering annuity deposit schemes with a tenor of three, five, seven, and 10 years. It allows a lump sum investment, and based on the deposited amount, the monthly interest payments start in the subsequent month.

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How The Suryoday SFB’s Deposit Scheme Works

Suryoday Small Finance Bank’s envisioned annuity deposit scheme is a recurring deposit plan that will allow monthly contributions towards the selected scheme throughout the first half of the tenor (10 years), and monthly interest payouts from the bank will start in the second half.

According to the 360 ONE AMC report the banking sector’s C/D ratio has reached a historical high, but the situation would improve as the government reduces its balances with RBI by increasing spending. However, an increase in currency demand in second half of the CY2024 putting pressure on deposits and CD ratio. Also, the open market sales of government securities by RBI could further deteriorate the credit-to-deposit ratio.

The report further adds that the government’s balances with RBI have come down as its spending picks up post-election, leading to improved liquidity in the banking sector.

But as the rate-hike cycle reached the peak, when RBI cuts the repo rates, it can trigger the fixed deposit interest rates to fall, which will make it harder for banks to mobilise deposits. Many central banks of developed countries have already eased their policy rates as inflation has reached their estimated targets. The US Fed is also expected to cut the federal rates when it meets in September, as hinted by Fed Chair Jeremy Powell earlier this week.

When asked whether innovative deposit products like FDs can solve the problem of increasing CD ratio, Adhil Shetty, CEO of BankBazaar.com said, “More differentiated products mean more options for customers and more targeted savings and investments. FDs have been the historical go-to investment for Indians. It is a simple product offering straightforward returns and capital protection over a fixed timeline. So, FD variants will be hugely popular among people.

“However, while individual banks may ease their credit-to-deposit ratio by raising fresh deposits, this alone may not be sufficient to solve the problem at a systemic level. That may need intervention from RBI and the government. The shift from FDs to mutual funds and stocks is a megatrend that has been seen over many years, so it’s not likely to be reversed by a longer-term FD. Consumers are after higher post-tax returns with high, penalty-free liquidity to address inflation.”