Whalesbook
Public sector banks have started raising interest rates on large deposits, a key move to manage their money as the economy expands. This change aims to attract more funds to keep up the strong lending growth seen this past year.
Why Rates Are Rising
Public sector banks are now offering around 7.5% interest on one-year bulk deposits of ₹3 crore and more. This directly responds to surging credit demand, which jumped 15.9% in the fiscal year 2026, up from 10.9% the previous year. This strong lending growth spans across sectors: services saw 19% growth, personal loans 16.2%, industry 15% (with MSMEs at 33.1%), and agriculture 15.7%. Raising deposit rates helps banks secure a reliable source of funds to keep lending and support economic activity.
The Competitive Landscape
The roughly 7.5% rate on PSU bulk deposits means banks are increasing prices in a competitive market. This is higher than the typical 6% to 6.6% on general fixed deposits at PSUs, but still below the rates some NBFCs and small finance banks offer, which can go up to 8.5%. Private banks are also competing strongly, offering up to 7.75% for senior citizens and 7% to 7.75% for others. Banks are competing for deposits as overall deposit growth (12.3% year-on-year in April 2026) has lagged behind credit growth (15.9% in FY26). This has pushed the system's credit-to-deposit ratio to about 82%. PSU banks were in a better position with lower CD ratios (around 74-75% in late 2025) compared to private banks (near 90-92%), giving them more room to lend. The strong credit demand suggests an economic shift from consumption to capital investment, fueled by government spending, reforms, and more households managing their finances through financial products. A growing number of women borrowers are also contributing to this demand.
Risks to Profitability
This push to gather deposits carries risks. Banks expect their Net Interest Margins (NIMs) to shrink by 10 to 15 basis points in FY26. This means the higher cost of deposits could grow faster than the income from loans, potentially hurting profits. While PSU banks usually have more stable margins because they borrow less from markets and have healthier credit-to-deposit ratios, this rate hike shows they urgently need funds. If deposits don't keep up with loans, PSUs might need to use more expensive market borrowing. Also, the system's credit-to-deposit ratio is nearing the Reserve Bank of India's (RBI) 85% limit for potential action, requiring careful money management. The higher rates from NBFCs and SFBs also make it harder to keep attracting steady, cheaper customer deposits.
Outlook Ahead
Credit growth is predicted to slow to 12% to 13% in FY27. This moderation could ease funding demands. However, households are increasingly shifting savings towards various financial products instead of just fixed deposits, making it harder for banks to attract stable, low-cost funds. PSU banks must carefully balance the cost of new deposits against their lending income to manage potential profit squeezes and ensure steady growth in a changing market and regulatory landscape.