Frees savings rate banks give split verdict

The last bastion of administered rates was removed on Tuesday, with the Reserve Bank of India (RBI) deciding to deregulate savings deposit rates with immediate effect. Banks were paying four per cent interest on their savings deposits.

Banks that do not have a strong base of low-cost deposits are likely to benefit from this move as these lenders are now free to offer higher rates to attract savings deposits. This means depositors can now earn more interest income from their idle cash.

For instance, it took no time for YES Bank to raise its savings deposit rate by 200 basis points to six per cent. The private lender’s share of low-cost current account savings account (CASA) deposits was only 11 per cent of the total deposits as of September-end.

“It is a path-breaking development and possibly the best reform in the banking sector in the last few years. The deregulation will augur extremely well for Indian savers. Apart from giving benefits of a superior rate, the move will significantly improve service standards, result in superior product features and bring the demise of lazy banking,” Rana Kapoor, founder, managing director and chief executive of YES Bank told Business Standard.

Many analysts believe deregulation of savings deposit rates will erode banks’ profitability in the coming quarters as the cost of funds will become dearer amidst slowing growth in advances.

“This deregulation of savings bank accounts will be a new bullet to bite for the banking system. While it is a Diwali gift for the general public and bank customers, it surely is one more body blow for the banking system to handle,” said Jagannadhan Thunuguntla, strategist and head of research at SMC Global Securities.

RBI has said while banks are free to determine the savings deposit rate, they will have to offer a uniform rate on savings deposits up to Rs 100,000 irrespective of the amount in the account.

Banks, however, can offer differential rates of interest on savings deposits above Rs 100,000.

"There should not be any discrimination from customer to customer on interest rates for a similar amount of deposit," the central bank said in a statement. RBI will separately issue operational guidelines on savings deposit rates soon. However, not all bankers were euphoric with this move. "The savings account is largely a transaction vehicle. It is not a vehicle on which you earn interest. For the more affluent, the excess amount is already transferred through appropriate sweep facilities into a fixed deposit account," Aditya Puri, managing director of HDFC Bank, said.

Puri believes higher interest rate on savings deposits will also push up service charges on such accounts. HDFC Bank's CASA ratio was at 47.3 per cent as of September-end.

"The rate is free and can move both ways. If some bank can uniquely distinguish itself in terms of service and say we won't pay more than 3.5 per cent, they may still get away with it," said Pratip Chaudhuri, chairman of State Bank of India (SBI).

The country's largest lender had a CASA ratio of 47.89 per cent as of June-end. It is yet to detail its second-quarter numbers.

Chaudhuri said SBI was not in a hurry to revise its savings deposit rate. "We will see how it plays out," he said.