Is India’s Love For Fixed Deposits Slowly Fading?

The proportion of term deposits in the overall deposit base of Indian banks is declining.

A customer waits to deposit Indian 100 rupee banknotes at a counter inside an Axis Bank Ltd. branch in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  
A customer waits to deposit Indian 100 rupee banknotes at a counter inside an Axis Bank Ltd. branch in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Fixed deposits have been the ‘park it and leave it’ option for many Indians who wanted to earn a return on their surplus cash without taking on any substantial risk. They offer safety and predictability.

But the preference for bank fixed deposits is on the wane, with many customers choosing to hold their money in savings bank accounts for consumption or invest it in mutual funds. While fixed deposits, broadly known as term deposits in industry parlance, still form a majority of the deposit base of banks, their share has been declining.

The latest round of basic statistical returns of banks, released by the Reserve Bank of India last week, shows that the share of fixed deposits fell to 57.7 percent in 2017-18 compared to 58.6 percent in the previous year. Since 2008-09, the share of term deposits has fallen from 63.5 percent to under 58 percent now.

In contrast, savings deposits now make up 32.9 percent of total deposits, a rise of 6.4 percent over five years, according to data released by the RBI last week.

The share of savings deposit in total deposits has gone up further during the year on top of high growth during 2016-17, when demonetisation generated a sudden jump in the share of savings deposits: the share of term deposits has been declining gradually during the last five years.
RBI Basic Statistical Returns

Narrowing Gap Between Savings Deposits And Fixed Deposits

The shift in trend is because of a number of reasons, said Virat Diwanji, president of retail liabilities and branch banking at Kotak Mahindra Bank. After deregulation of interest rates on savings deposits by RBI, many banks are offering higher rates on these deposits, he said. While rates on savings deposits have risen, periods of excess liquidity prompted banks to cut rates on fixed deposits.

The resultant lower rate differential between savings and fixed deposits has prompted people to leave money in their savings accounts, providing them with instant liquidity and good returns, said Diwanji.

Currently, savings deposits in the country’s largest bank, State Bank of India, attract an interest rate of 3.5 percent per annum up to Rs 1 crore. Interest rates for term deposits range between 5.75 percent for seven days to 6.85 percent for 10 years. But a number of smaller private bankers are offering high rates on savings deposits. Kotak Mahindra Bank offers between 5-6 percent. Yes Bank offers between 5-6.25 percent and RBL Bank offers between 5.5-7 percent. Rates differ based on the amount of money in the savings account.

Consumption Over Savings

Surinder Chawla, head of branch and business banking at RBL Bank, said that the shift away from fixed deposits also reflects the change in the underlying economy where consumption is taking preference over savings.

India’s savings rate declined to 30 percent at the end of March 2017 compared with 34.6 percent in FY12, suggested an India Ratings study last year. This change in saving habits could also be playing a role in the shifting deposit mix.

Like in developed economies, the country’s young working class is now moving money out of term deposits to savings deposits, facilitating higher consumption, Chawla said.

Access To Mutual Funds

Even those who are continuing to save now have a wider suite of savings products to choose from. Mutual funds, particularly through their systematic investment plans, have proved to be worthy competitors to the trusted bank fixed deposits.

While mutual fund products have market risk associated with them, SIPs help moderate that risk and have increased the appeal of equity investing to smaller investors.

This is essentially a phenomenon where savers who were earlier happy with FDs are turning investors by investing in equities and liquid and short term mutual funds.
Virat Diwanji, President, Retail liabilities and Branch banking, Kotak Mahindra Bank

In particular, the move towards other investment avenues has led to a reduction in term deposits of over two years as a percentage of total term deposits. The central bank’s database shows that deposits over 2 years made up 32 percent of term deposits compared to over 36 percent in 2015-16.

What This Means For Banks

Savings deposits entail lower interest costs in comparison to fixed deposits, which, in turn, is beneficial for the net interest margin of banks. However, they can also result in higher transaction costs for banks.

Deposits of shorter tenors also disturb stability as banks constantly match assets and liabilities, said Chawla. It is important to remember that these factors do not work in isolation, he added. There is a difference in interest rates on savings accounts of every bank. Every bank has their own journey in how they match assets and liabilities, he added.