Banks court funds via creative deposit products in a bid to defend margins

The banks are seen becoming more creative these days, offering some deposit products with unconventional tenures as they try to court customers, if otherwise would invest directly in Treasury bills.

Despite some notable gains in the deposit portfolios of the banks since policy rates were hiked substantially from April onwards, the depositors have shown much preference to park their monies directly in short-term Treasury bills for very attractive and much higher yields than what the banks are offering for their deposits. 

In fact, the banks have witnessed that some customers holding large deposits have withdrawn their deposits to invest in short-term bills, specially in three and six-month bills, of which the yields have surged above 30 percent.
In response to this shift in the depositors’ taste, the banks have designed a suite of products with both conventional and unconventional tenures such as 100-day and 200-day deposits, with minimum deposit amounts and attractive rates at maturity.

Almost all of these deposit products are skewed towards the short-term, due to the uncertainty in the medium and longer-term tenures. 

These are then invested back in three and six-month Treasury bills, giving the banks higher margins.
By coming up with new product offerings at attractive rates, the banks are trying to preserve their margins, which otherwise could come under pressure, if they were to reprice their existing 
deposit products. 

With that, the banks now could reprice them only when they reach maturity, keeping the increase in their cost of funds to a more measured level. 

When the rates rise, the banks tend to raise their loan rates much faster than the deposit rates, so that they benefit from fatter margins while the opposite happens when the rates decline. This is what the banks typically do as part of their asset and liability management.