SBI cuts interest rate on savings bank deposits. Will other banks follow?

State Bank of India (SBI) has introduced a two-tier interest rate structure on savings bank deposits. With effect from July 2017, a savings bank balance of over Rs 1 crore will earn an interest rate of 4% per annum (p.a.), while the ones with Rs 1 crore or less will earn an interest rate of Rs 3.5% p.a. The move sent the stock soaring 4% in intra-day deals to Rs 313 levels on the Bombay Stock Exchange (BSE).

“The decline in the rate of inflation and high real interest rates are primary considerations warranting a revision in the rate of interest on saving bank deposits,” SBI said in a release. 

Savings bank deposits with SBI since June 2011, as with most other banks, earned an interest of 4%. For SBI, around 90% of the deposits came under less than Rs 1 crore category, SBI said in an analyst concall.

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Most analysts have given a thumbs-up to the development as the rate of interest on savings bank deposits had not been rejigged since long. The move, they say, will benefit the bank in the long-run and aid profitability. They also expect other large banks to follow suit and slash rates on savings bank deposits.

Kunj Bansal, ED & CIO at Centrum Wealth Management says the move to cut savings bank rate is a positve and he expects more banks to cut savings bank interest rates going ahead. That apart, SBI, he says, will also save on the interest costs going ahead.

“This is a positive move and I feel more banks, especially the large ones, will try to follow suit. A cut of 50 basis points (bps) is huge. Savings bank deposit rates have not been tinkered with since long and it was about time that the banks addressed this issue given the current inflation level and the road ahead,” feels A K Prabhakar, head of research at IDBI Capital.

Earlier in 2017, the Cabinet had approved the merger of five associate banks — State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore — with SBI.

The merger with the associate banks, experts believe, had been one of the long pending agendas. Branch rationalisation, if executed well, would be one of the key synergy benefits. Cost savings on account of treasury operations, audit, technology, etc would also lower the cost-to-income ratio in the long term, analysts had said then.

“The rate cut by the SBI on savings bank account is a strategic move by the bank aimed at increasing profits. SBI has an above average CASA ratio of 45.58% for the year ended March 31 2017, which shows that it has large savings pool. This move will result in increasing its net interest margins which are currently below standards at 2.84% for the quarter ended March 31, 2017. This is purely a commercial move which will boost profitability and ratios for the bank,” says Jimeet Modi, CEO, SAMCO Securities.

IMPACT ON NET INTEREST MARGIN

For SBI, the cut in deposit rates, analysts say, will be positive for its net interest margins (NIMs). This premise, they say, is based on the fact that the cost of borrowings shall come down which will get offsetted by the fall in lending rates, but the net net effect should be expansion in NIM for SBI. 

"With real rates expected to be subdued, based on the soft trend of inflation expected for the coming fiscal, a cut of 50 bps will not spiral a downward trend in the outflows for SBI. The management was categorical in stating that the flows received post demonetisation, around 60% have stayed with the bank, which gives the additional buffer, that the rate cut will not result in to major outflows," says Siddharth Purohit, senior equity research Analyst for banking at Angel Broking.

With this move there is high possibility that the one-year deposit rates could also see some softening. SBI's decision to slash rates also comes ahead of Reserve Bank of India's (RBI's) two-day meeting on interest rates, which concludes on August 2.

"While most of the banks will try and take a cut from SBI, it is to be seen whether other banks follow suit or not. In our opinion  a few private banks which been trying to scale up their CASA base might hold on to the rates," Purohit adds.