Reserve Bank of India’s decision to free deposit rate will impact banks’ policy diversely.
Chairmen of banks with a higher proportion of savings bank deposits used to have an extra spring in their steps. However, things have changed over the past two days.
The Reserve Bank of India’s decision on Tuesday to free the savings bank deposit rate has caught the bigger banks, especially those with a higher proportion of savings account deposits, on the wrong foot. These banks had advocated savings rate deregulation at a time when interest rates had a negative bias. RBI’s decision comes at an inopportune time for them.
Impact on NIM (bps) if savings bank rate increased by
|NIM: Net Interest Margin Source: Kotak Securities
The country’s largest lender, State Bank of India, is planning to increase its savings bank rate, presently four per cent. “We are looking into the impact. We may increase the rate. Our asset liability committee will meet shortly to take a view,” said A Krishna Kumar, its managing director in charge of national banking.
SBI Chairman Pratip Chaudhuri on Friday told a TV channel that the bank could increase interest rate on savings bank accounts by up to 1.25 per cent in view of competition following freeing of such rates by RBI. “On an average...We are expecting 100-125 basis points increase in the funding cost of savings bank,” Chaudhuri said.
He said their additional annual interest burden would be Rs 1,500 crore if they raised the savings rate by 50 basis points (bps). Around 38 per cent of SBI’s total deposits of Rs 9.5 lakh crore comes from savings accounts. The bank is expected to take a hit of 19 bps on its margin if it raises the savings rate by 50 bps, to 4.5 per cent. According to an estimate prepared by Kotak Securities, SBI’s net interest margins would see a contraction of 57 bps if it raised the savings bank rate by 150 bps. SBI had reported a net interest margin of 3.62 per cent during the first quarter of the financial year. For 2010-11, the bank’s NIM was 3.32 per cent.
Another government-run lender, IDBI Bank, indicated on Friday that it may increase the savings deposit rate. “The bank is considering some increase. But, we will like to see what large banks do,” said its executive director, R K Bansal. IDBI's share of low-cost deposits – savings and current accounts – in total deposits was 19 per cent at the end of September. For a one per cent increase in the savings bank rate, IDBI will incur an additional Rs 140 crore. The average amount maintained in bank's savings account is Rs 27,000-28,000 crore, Bansal said.
Analysts said banks with high savings bank deposits would be impacted more. Smaller ones such as YES Bank and IndusInd Bank, which have a robust technological platform, may benefit at the cost of others whose platforms were weak. Following the deregulation, YES Bank raised the rate by 200 bps, to six per cent.
“Deregulation appears negative for banks with high savings deposits in their liabilities, as increases in the savings rate would put some pressure on margins,” HSBC Global Research said in a note.
Jagannadham Thunuguntla, strategist & head of Research at SMC Global Securities, agrees. As on March 31, he said, the total savings bank balance in the entire banking system was Rs 14,46,900 crore. Assuming that over a period of time the interest rates on the savings bank account would rise by one per cent, the additional interest that all banks put together need to pay is about Rs 14,469 crore. This would reduce their profitability by 12.85 per cent, he added.
The impact can be serious on banks such as Bank of Maharashtra (where profits can fall by 52 per cent), DCB (by 37 per cent), United Bank (by 35 per cent) and Dhanlaxmi Bank (34 per cent), SMC said in a research note. While the private sector lenders have hinted at raising their transaction charges to offset the impact, public sector banks may find it difficult to do this, bankers said. Krishna Kumar also ruled out such a possibility any time soon at SBI.
Analysts say a deposit rate rise alone would not be sufficient to woo customers. “This is definitely a new tool (unavailable earlier) to attract new as well existing customers. However, saving deposits are sticky in nature and traction in these for a bank on a sustainable basis is only possible with better service and better reach to customers, along with more and more product innovations,” said Saday Sinha, analyst with Kotak Securities, in a research note.
SBI has planned to make savings accounts attractive. “We are planning to introduce multi-city cheque options and may bundle other products like insurance with the deposit accounts to attract depositors,” said Krishna Kumar.
On the other hand, IDBI Bank, which had waived most charges related to the savings account to woo customers, may re-introduce these as cost increases. “Though we opened more savings bank accounts after the waiver of fees, the experience with the initiative has not been satisfactory,” said another official.
Bankers also said since most savings bank accounts had deposits of less than Rs 1 lakh each, the regulator should have allowed a differential interest rate below that limit. “The regulation should have permitted this, with a stipulation of a minimum rate so that small savers’ interest remains protected,” a senior banker said. RBI had said while banks were free to determine their savings deposit rate, they would have to offer a uniform rate on such deposits up to Rs 100,000, irrespective of the amount in the account. Banks are allowed to offer differential rates of interest on savings deposits above Rs 100,000.