Banks not to be hit much by new rate system: Crisil

The move to the daily average method of computing interest on savings accounts from April 1 will not materially impact banks’ profitability, according to ratings agency Crisil.

The agency says the cost of deposits for banks will increase by 10-20 basis points depending on the share and pattern of current and savings accounts (Casa). “However, this will not materially impact their profitability or lead to any significant change in the share of low-cost deposits, that is Casa, in the banking system,” Crisil said in a report.

The new method of interest computation will increase the effective interest rate on savings balances, particularly for salary-account holders. It is estimated that for a salary-account holder with minimum savings balance of one-two times the monthly salary, the increase in interest income will be 10-25 per cent.

The impact of the increased interest outgo on banks will be limited due to the existing low interest rates on savings at 3.5 per cent and the relatively low share of savings deposits, varying between 15 and 25 per cent, in the overall deposit base of the banks.

“Assuming that the entire savings balances for the banks are transaction intensive, the overall increase in the cost of deposits for banks will be between 10 and 20 bps,” said Crisil. The impact is expected to be higher for banks that have a dominant share of salary accounts with highly fluctuating balances.

The average Casa levels in the domestic banking system stood at 33 per cent, with savings deposits accounting for 22 per cent, as of March 2009. The share of savings deposits is estimated to have increased to 25 per cent as on December 2009, which would translate into an increase of 2-4 per cent in Casa levels by March 31, 2010.

This has been primarily due to sharply reduced interest rates on term deposits and a moderate credit growth regime, which has led to banks’ retiring high-cost wholesale deposits. However, according to Crisil, any further increase in the system Casa levels is unlikely. While savings-account holders will benefit from a higher effective rate, the benefits are likely to be offset by the increasing differential between savings and term deposit rates and the higher investment options available to retail depositors over the medium term.