Aggressive reductions in deposit rates by foreign banks in India have opened up the widest interest rate gap between these banks and their local counterparts in more than seven years.

Foreign banks have a weighted average term deposit rate of 3.33%, and the difference with state-owned banks was at 241 basis points (bps) in September, Reserve Bank of India (RBI) data showed. One basis point is one-hundredth of a percentage point.

Currently, London-based HSBC pays 3.25-3.75% on deposits of one-two year tenure, a period typically used as a benchmark, in India.

Deutsche Bank pays an interest of 3.85-4.5%, and Citibank pays 3-3.25% for the same tenure.

In comparison, a depositor earns 4.9-5.1% at State Bank of India (SBI) and 4.9-5% at HDFC Bank.

All these rates are for deposits below 2 crore. There are a few outliers such as London-based Standard Chartered Bank, which continues to pay 5.4-5.5% interest for the one-two year tenure.

While foreign banks have always paid about 100 bps less than the state-owned and private lenders, the gap has been consistently widening for over a year now.

Experts said that the move by foreign banks is an attempt to lower retail liability due to the lack of credit growth opportunities.

The deposit rates have been declining across the banking system since January 2019, with the Reserve Bank of India (RBI) lowering its repo rate by 250 bps between February 2019 and now.

The weighted-average term deposit rates for all scheduled commercial banks have fallen 124 bps since January 2019.

To be sure, foreign banks have also lowered their lending rates at a faster pace than their Indian peers.

While the surge in liquidity had led to lower lending rates as well, interest rates on existing loans have seen a paltry decline of 68 bps since January 2019. However, new borrowers seem to have benefited the most as their interest rates have declined by 168 bps in the same period.

Experts said foreign banks do not really depend on term deposits for funds, and it is typically the high net-worth individuals (HNIs) who park their money.

“Given the kind of minimum balances some of these banks have, they are not meant for everybody,” said Madan Sabnavis, chief economist at Care Ratings. Moreover, in terms of lending, it is mostly for high-end corporates and, therefore, these banks have a limited canvas, although they dominate the non-fund-based market.

“Since there are not too many borrowers in the market, you would want to dissuade depositors from coming in,” said Sabnavis. That, however, holds true for the entire banking sector, which despite aggressively lowering rates, has not seen a let-up in the inflow of deposits.

Bank deposits stood at 143 trillion as on 9 October, up 10.5% on a year-on-year (y-o-y) basis, showed data from the central bank. Some banks are also going slow on fresh deposits, trying to match the pace at which loan books are expanding. That would ensure their margins are protected. Credit growth has picked up pace with a 5.7% year-on-year growth as on 9 October, as compared to 5.1% as on 25 September.

Sanjiv Chadha, chief executive of Bank of Baroda, recently said that the bank has decided to grow the deposit book in tandem with the loan book. “There is a very large overhang of liquidity, and it is possible to grow deposits more aggressively, but we are conscious that every rupee that you gather in deposits and cannot deploy fruitfully is something which has an impact on our margins,” he said.

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