In a blow to savers, interest rates on fixed deposits have plunged to a 17-year low after State Bank of India (SBI) on Wednesday slashed the coupon on a one-year deposit by 40 basis points to 5.1%; in November 2003, the lender was offering 5% for one-year money.

While other banks offer higher interest rates — HDFC Bank pays 5.6% and both ICICI Bank and Bank of Baroda pay 5.55% for the same product — it is possible these lenders too will trim interest rates at a time when lending opportunities are limited.

To be sure, banks have been trimming lending rates — a home loan from SBI, for an amount of up to Rs 30 lakh now costs the borrower 7.4% down from 9.45% four years ago. However, banks are barely lending as can be seen in average fortnightly growth in non-food credit of just about 6-6.25% year-on-year; in fact there has been a fall in outstanding loans of Rs 1.36 lakh crore between March 27 and May 8.

Consequently, they see little reason to attract deposits and are lowering interest rates so as to protect their margins. However, even though deposits rates have been trending down for close to two years now, deposits continue to grow and are currently increasing at a robust 10-10.5% year-on-year

That has left lenders with a large surplus of close to Rs 8 lakh crore which is being parked with Reserve Bank of India (RBI) for a return of just 3.35%.

Financial experts attribute the steady rise in deposits to a lack of spending opportunities during the lockdown as also to the fact that consumers have turned increasingly cautious over the past year or so and prefer safe investments.

Uday Kotak, MD & CEO, Kotak Mahindra Bank had, in a recent conversation with analysts, observed the lender was witnessing very high inflows of deposits despite having dropped the savings deposit rates in April. Earlier this week, the bank lowered the savings rate further to 3.5%.

While the fall in interest rates on deposits will benefit banks over a period of time, the impact is felt over a larger amount of about Rs 125 lakh crore. In contrast, a cut in lending rates affects a much smaller base. The rate cuts by SBI follow a steep 115 basis points drop in the repo rate in two back-to-back cuts by the monetary policy committee (MPC) between March 27 and May 22; the move comes ahead of an asset liability committee (ALCO) meeting, scheduled for early June.

Since a portion of banks’ loan books are now linked directly to the repo rate, they have been quick to pass on the rate cuts to depositors as well. While there are exceptions to this, such as IndusInd Bank, which has raised deposit rates to stem outflows, substantially low deposit rates are now the new normal. SBI cut deposit rates for most tenures except for the 5-10-year one, where the rate was lowered by 30 bps.