‘Banks’ deposit rates have been changing ahead of schedule, which can’t be said about loans’

How the Central Bank’s key rate influences the attractiveness of banking products

The Central Bank brought the key rate to 4,25% a year in July — this is a record low. Such decisions almost always led to a proportional change of the main banking indicators — deposit rates, deposits and loans. But experts say that these indicators actually aren’t so obviously connected, and banks take advantage of the changes as a reason for reducing deposit interest rates for natural persons (and especially for legal entities).

Key rate reduced again

The Central Bank keeps lowering the key rate with amazing regularity. In the last year, it has decreased almost twice. In June 2019, it was fixed at 7,75%, it reduced to 7% in October, to 6,5% in November, to 6,25% in January 2020, to 6% by March. In May, it was lowered to 5,5%, to 4,5% in June, and it became known about a new record low on 24 July — the key rate was cut to 4,25%.

The key rate directly influences the economic life in the country. If we particularly compare it with rates of bank deposits and some types of loans, we can think they are intertwined: after a reduction in the key rate of the Central Bank, banks almost instantaneously reduce deposit rates. Moreover, such a process with loan rates is notably slower, and it is somehow perceptible only to mortgages in general. Economist and blogger Albert Bikbov explains how it works: banks take money from the Central Bank for a wholesale price and use retail prices with a surcharge for their own needs.

“Consequently, the key rate directly influences the interest rate banks grant loans and attract deposits at. Moreover, a change in the key rate influences the borrowing and economic activity,” he says.

“Banks’ main resource is money from deposits. Banks’ deposit rates have been changing ahead of schedule in the last years, moreover, changes often take places simultaneously with the Central Bank’s decision on the key rate, which, by the way, which can’t be said about loans. This is partly explained by the fact that lending organisations use the reduction of the key rate as a reason to lower their rates. Competition in the banking sphere decreased amid consolidation, the meaning of public organisation increased. The balance of demand and supply of the market explains deposit and loan rates now to a lesser degree and those signals the authorities send to banks — to a greater degree.

The key rate is the rate that determines the CB’s short-term operations with banks. The CB gives banks money with a rate tied mainly to the key rate for up to a week. It accepts deposits from them for comparable terms, largely from a day to a week. Now one of the ways how the key rate influences rates in the rest of the market is via banks’ deposits in the CB: banks have excessive liquidity, they don’t need to borrow money from the Central Bank but need to deposit it. But, as you understand, there is a big difference between a person’s deposit for a year and a bank’s deposit in the CB for a day or a week. So there is no close connection between the key rate and deposit rate in banks, and there can’t be.”

Highest rate for natural persons’ bank deposits is sometimes higher than CB’s rate

As Realnoe Vremya’s analytic staff’s research shows, banks try to catch up with the CB’s decisions less, this is why the recent situation with deposit rates becomes very unusual. At some moments the deposit rate offered by banks can be higher than the Central Bank’s key rate, but just in some cases.

Earlier, for instance, two years ago, the highest interest rate of bank deposits was by 0,3-1% lower than the Central Bank’s rate. Last March and April, the difference already decreased to 0,08-0,3%. With the beginning of sudden falls in the rate of the CB, the highest deposit rate in banks was at least even twice higher than the regulator’s rate. For instance, in May 2020, the highest deposit rate was 5,51% a year with the key rate of 5,5%, in June it was 4,99% with the key rate 4,5%. In other words, rates in one of the deposits turned out y almost 1,5% higher than the CB’s rate.

Indeed, there is no direct link here, as Yevgeny Nadorshin from Capital PF already said:

“Banks don’t really need to borrow money now — big banks don’t need this due to excessive liquidity. Generally speaking, it is the reason for a stable and steady reduction in deposit rates approximately since 2015, with short breaks (for instance, there was a slight jump in 2018).”

The reduction of the key rate is just kind of formal reason for a reduction due to the specifics of competition in the Russian banking sector. We can say banks (and public banks account for a big share of this market) aren’t bold enough to suddenly reduce deposit rates: they go by certain social aspects. It isn’t hard to imagine a manager of a state bank is called on the carpet and asked: “What are you doing? You’ve begun to borrow the population’s money at 0%”. Given the share of deposits in banks with public partnership, the phenomenon of rate reduction after the key rate reduction is explained. Unfortunately, it isn’t a true market mechanism. But if we had a fully-fledged market, we would have cheaper deposits and costlier loans.”

Rates depending on key rate envisage high risks

Big numbers relatively mean a bank’s highest rate — it needs to be found, and one should avoid a sudden change in terms (rates can change literally in a day). Average weighted rates, of course, are lower and very dependent on different parameters, particularly, the term of a deposit. For instance, at the peak of the last years, when the key rate was 7,75% and the highest deposit rate was 7,68% in March 2019, banks offered deposits at 4,59-6,43% on average. Deposits from six months to a year had the highest rate, deposits on demand had the lowest rate. And the highest rate was already 5,43% by April 2020 when the key rate was equal to 6%, while the average rate varied from 2,86% to 5,18%.

The status of the depositor is another one of the most important reasons for the size of a deposit rate. Banks offer different rates depending on if the depositor is a natural person or a legal entity. For instance, by late June (when the key rate was still 4,5%), natural persons could count on the rate of 7% a year (though it applied to integrated programmes with investment life insurance, ordinary deposits were offered with a rate that’s at least by 0,5% lower), the minimum was 0,5-1% but more often it was 3-4%. The highest rate for legal entities during the same period was just 5,25%, the lowest — about 1%.

Moreover, it is an individual question if these rates stay in case the CB’s key rate changes, it depends on terms of a specific bank in a specific deposit. Terms of the agreement determine everything — there can be rates fixed in the agreement and floating rates.

As Albert Bikbov says, floating rates are often tied to the key rate of Russia’s CB. Moreover, the use of each of these types of rate has pros and cons.

“The use of floating deposit rates are profitable for a bank when the key rate goes down. The same can be said about loans, but for depositors in this case. But everything suddenly changes. If rates began to grow in the market, borrowers start to have additional interest incomes, which leads to a rise in the financial burden. And it is risky. Depositors start to have additional incomes from higher interest rates, but this becomes costly for a bank. Fixed rates have pros and cons as well. On the one hand, one can plan interest payouts and receipts. On the other hand, in case the market changes, what is written in the agreement must be paid, not what the market offers. So every option has pros and cons, and good financiers try to choose the optimal option according to their forecasts and expectations,” he says.

Market decides, but there are other reasons as well

The regulator’s key rate and the depositor’s legal status aren’t the only things the size of bank deposit rates depends on. Not all banks can receive a lot of money through operations with Russia’s Central Bank — there are certain restrictions on a bank’s rating and other similar parameters. In fact, some banks have to resort to more expensive sources.

According to Albert Bikbov, deposit rates are sometimes higher than the key rate, but this tool enables us to borrow money to grant a loan:

“Deposit rates for legal entities and natural persons in general are determined by competition in the market as well as loan rates. If a specific local market is very competitive, this, as a rule, leads to a rise in deposit rates and a fall in loan rates. Moreover, different banks have different opportunities to get deposits — some have a high rating or a low funding cost (that’s to say, there are a lot of cheap sources of money, for instance, in the form of balance on settlement and current accounts). This means banks have different positions in a competitive fight for a client, including by interest rate fixing.

Mortgage seems to be almost the only type of loan where a steady reduction is outlined. Photo: Maksim Platonov

Crisis makes loan rates increase

Loan rates in banks are expectedly much higher than deposit rates. The dependence of the amount of the key rate can be noticed as well, but the difference isn’t so big. For instance, a mortgage on a second-hand dwelling could be taken out at 8-14% in Kazan banks in June 2020, but banks mainly offer about 9%. It should be reminded at the same time that the key rate was 5,5%. To compare, a mortgage on a second-hand dwelling could be granted at 9,3-14% a year in January with the key rate equal to 7,75%, mainly at 11%. The rate in new flats is from 5,85% in case it is a mortgage with public participation and from 8% to 15% without it. In January 2019, the rate was 9,3-15% a year.

Banks’ risks explain such a significant difference between deposit and loan rates. According to Albert Bikbov, the market determines loan rates:

“If the market is dull, that’s to say, demand for loans is low, banks try to reduce rates. If demand for loans goes up, rates go up because there are customers. But when there is economic uncertainty, a crisis like today, banks can’t forecast one of the main bank risks — credit risk. This is why loan rates include additionally the amount of the adjustment to the higher risk. In other words, banks don’t rush to reduce rates until it gets clear what will happen in the economy in the middle term,” he explains.

Mortgage seems to be almost the only type of loan where a steady reduction is outlined.

“Other loans’ rates don’t go down so suddenly. For instance, the risk premium has grown very much this year, though banks’ funding costs reduced because of a reduction in the population and legal entities’ deposit rates (the main source of banks’ borrowed money). Growth of borrowers’ risks led to a situation in which banks decided not to reduce rates of many loans, while some probably increased them in specific programmes, for instance, by including the record of the most affected sectors to scoring models. How are they included? They are added to the list of risky customers, grant smaller loans with a higher rate or don’t grant at all. As a result, banks simply receive a higher margin from some categories of borrowers, and there isn’t seen a fast reduction in loan rates in reply to the CB’s actions in the market like in the case of a mortgage,” says Yevgeny Nadorshin from Capital PF.

By Maksim Matveyev, Realnoe Vremya’s analytic staff