Banks that have been offering a higher interest rate on savings bank accounts have started reducing rates, prompted by the easing liquidity scenario and high operational cost of offering high rates on smaller amounts.
Recently, both IndusInd Bank and Kotak Mahindra Bank have reduced their interest rates on savings deposits below Rs 1 lakh by 50 basis points to five per cent. Similarly, IndusInd Bank had also reduced its interest rate on savings deposits by 100 basis points to 4.5 per cent on a daily balance of up to Rs 1 lakh.
Bankers say the general softening of interest rates in the industry has prompted them to reduce rates on savings bank accounts also.
Sumit Bali, executive vice-president of Kotak Mahindra Bank, says, “There is a general sense of easing of money supply in the system. The deposit rates have continued to outpace credit growth rate and as a result you will see softening of interest rates in the savings bank account and also in shorter tenures.”
As per October 3, Reserve Bank of India data credit in the banking system grew by 11 per cent year-on-year, whereas deposits grew by 13 per cent in the same period.
“Apart from softening of the interest rate regime in the banking system, high operating cost of maintaining the savings account would have had also prompted banks to reduce interest rates in the below Rs 1-lakh bucket,” said Anish Tawakley, analyst at Barclays.
Experts said paying high interest rates on small bank accounts is a drain on the bank’s balance sheet, as the operational cost is high and as a result the cost outweighs the benefits. This has been making it unsustainable for lenders to offer high rates on small balances.
However, in case the balances are above Rs 1 lakh, then the operational cost comes down significantly and therefore lenders can still manage to pay high interest rates.
Lenders are continuing to offer high interest rates on balances above Rs 1 lakh, as they see it as a good marketing proposition.
Bankers believe they might see some marginal impact but the overall growth of the current account and savings account deposits (Casa), known as low-cost deposits, will not be impacted.
Vaibhav Agrawal, VP Research – Banking, Angel Broking, said the customer behaviour in the below Rs 1-lakh bucket also has an important role to play. “Banks say that people who have less than Rs 1 lakh balance are generally not affected by a small revision in interest rate as the money in these accounts are generally for transactional purposes only and so they will not switch banks or close the account if slightly lower interest rates are being offered. And on the other hand for the bank it translates into much lower cost without much damage.”
Unlike this segment customer with a balance above Rs 1 lakh might move the money to fixed deposits if the rates are slashed and as a result banks have left the over Rs 1-lakh bucket untouched.
Romesh Sobti, MD & CEO of IndusInd Bank, also said they haven’t seen any significant impact in the portfolio so far after the revision in rates.
Banks had started offering differential rates on savings account after RBI had deregulated savings bank account interest rate in Oct 2011. YES Bank, Kotak Mahindra Bank and IndusInd Bank were the lenders who in a bid to chase Casa growth had started offering high interest rates on savings bank account.
YES Bank still continues to offer six per cent for balance below Rs 1 lakh.
Pralay Mondal, Senior Group President-Retail & Business Banking, said there are no immediate plans to revise interest rates on savings account. “We are continuing to focus on our retail business and so we will try and offer high interest rates till we can.”