Kerala Bank has implemented a reduction in interest rates for its long-term deposits, effective 1 July 2025. This move, which reportedly aligns with Reserve Bank of India (RBI) guidelines, is set to impact individual depositors and poses a fresh challenge for the state's co-operative banking sector.
The decision sees a cut in the higher interest rates previously offered on deposits, potentially affecting those who relied on Kerala Bank for favourable returns on their savings. This adjustment comes as financial institutions often realign their rates with central bank directives.
The new rates could also create significant pressure for co-operative banks across Kerala. These institutions reportedly have a substantial portion of their deposits – estimated at around ₹37,000 crore – held with Kerala Bank. A reduction in the interest earned on these funds could directly impact their revenue streams, potentially affecting their operational viability.
Co-operative banks traditionally attract depositors by offering competitive interest rates. Their ability to maintain these attractive rates could be compromised if their own returns from Kerala Bank diminish. This situation might compel them to reduce the interest they offer to their own depositors.
There is growing apprehension among co-operative banks that a potential decrease in deposit interest rates could lead to a withdrawal of funds by their customers. A significant number of their depositors, particularly those over 45 years of age, might seek alternative investment avenues offering higher returns, such as the stock market. This shift in investment preferences is already a noted trend, and reduced bank interest could accelerate a move away from traditional banking deposits.
Many co-operative banks in various parts of the state are already navigating financial difficulties. An additional blow from reduced interest income and potential depositor outflows could exacerbate their precarious position.
Kerala Bank's revised interest rates, with the previous rates indicated in brackets, are as follows:
15 days to 45 days: 5.50% (6%)
46 to 90 days: 6% (6.5%)
91 to 179 days: 6.5% (7%)
180 to 364 days: 7% (7.35%)
One year to less than two years: 7.10% (7.75%)
Two years and above: 7% (7.85%)