mumbai, June 20 -- Lenders will have to fight harder for deposits as savings rates plunge to a 25-year low and term deposit rates see sharp cuts, raising the spectre of a liquidity squeeze if and when credit demand picks up. Even as a 100 basis point reduction in the repo rate has forced lenders to reduce deposit rates, banks hope that savers would continue to park idle funds with them given the broader economic uncertainties. The Reserve Bank of India's rate cuts have automatically brought down loan rates on 60% of floating rate loans, which are linked to external benchmarks like the repo. However, since term deposit rates can be lowered only at the time of opening or renewing a deposit, banks are forced to slash savings rates more to maintain margins. "Savings deposit rates are being cut across the banking system and it is not limited to a few players anymore. The reason banks are doing that is because the transmission in savings deposits is immediate, unlike a term deposit which happens with a lag," said Joy P.V., executive vice-president and country head of deposits, wealth and bancassurance at Federal Bank. Joy said the latest 50-bps reduction in the repo rate will lead to a decline in yield on advances or the average lending rate of a bank's loans and, there is no option but to cut deposit rates. Deep deposit rate cuts could lead to a re-run of last year's liquidity crunch that prompted former RBI governor Shaktikanta Das to remark in August that "alternative investment avenues" were becoming more attractive to retail customers, and banks were facing funding challenges. "This may potentially expose the system to structural liquidity issues," Das had cautioned in July. To be sure, the liquidity situation is different now than last year, with system liquidity comfortably in surplus.As rates fall, attracting deposits could become challenging, bankers said. Large banks like State Bank of India, HDFC Bank and ICICI Bank recently lowered their savings deposit rates to 2.5-2.75%, the lowest since RBI began collecting such data in FY01. While savings deposits earned 4% interest in FY01, the rate stood at 2.7-3% in September 2024. "Today, deposit rates, especially savings, are very low and a potential depositor or investor is likely looking at all possible options, including deposits, that provide some real rate of return. In that context, a deposit product paying 2.5% will not be seen as an investment product and attract a whole lot of funds," said Saswata Guha, senior director, financial institutions (banks), Fitch Ratings. Guha said he was not sure if there are ways other than making deposits more attractive for current and potential customers for greater deposit mobilization. Other bankers are hopeful that faced with macro-economic uncertainties, many investors may stick to safer options such as bank deposits, said Biji S.S., senior general manager and head of branch banking, South Indian Bank. The chief executive of a public sector bank said the lender could go for a 15-20 bps cut in savings rate, joining peers who have already done so....