As Aditya Puri is so fond of reminding us: there?s no free lunch. The managing director of HDFC Bank is right, and if savers believe they?re suddenly going to be making fistfuls of money simply because interest rates on savings bank accounts have been freed, that?s not about to happen. For one, banks will soon find a way to charge customers who may not even figure out that they?re coughing up additional amounts for some product or service; they?re not about to gift away their profits. The private sector banks will be quick to pass on the higher costs in the form of higher loan rates or transaction charges or a mix of the two. In fact, Kotak Mahindra Bank was already innovating to attract more CASA by offering customers more on their savings accounts through the ?auto sweep? facility: so those who opted for the ?sweep?, and the smart savers surely did, were already earning as much as 6% or 7% with the money there to use when they needed it.
The public sector banks may find it a tad more difficult to pass on the costs but even they can double or treble the rentals on safety lockers without the Reserve Bank of India (RBI) frowning on them and customers paying up without a word. As the math shows, a 200-basis-point rate increase on a deposit of R10,000?the average ticket size for a savings deposit is actually smaller, estimated at about R1,000 in rural areas, R1,700 in semi-urban areas and R3,400 in urban and metro regions?works out to R200 a year. Or, to make R50 a month, one needs to leave an amount of R30,000 in the bank through the year.
The Credit Rating and Information Services of India Ltd (Crisil) expects the average interest rate on savings accounts in the banking system to increase by 50 to 100 basis points over the medium term, so that would translate into an even smaller benefit.
Since the main reason for operating a savings bank account is not really to earn interest but to be able to access money for small purchases, it doesn?t make sense to rush around opening new accounts. In fact, if most banks up the rate to some extent, say 100 basis points, the difference between one and another would be even smaller than 200 basis points. That is hardly likely to convince small savers to switch banks, given there?s always some amount of inertia. Even rate shoppers will stop to assess the attendant benefits that come with the account. Ultimately, banking is still a relationship and trust business. Again, while it could be said that private sector banks were considered to be more efficient, that trend is changing, with public sector banks now offering reasonably good service. There could be greater competition, among banks, for the big-ticket savings deposits of over R1 lakh, especially in the urban and metropolitan areas, which Crisil estimates, constitute around 60% of the banking system?s
savings deposits. And on such larger sums customers would surely benefit, though typically savers who belong to this category would.
But it?s not surprising that Pratip Chaudhuri, chairman of the country?s biggest bank, State Bank of India (SBI), is holding his horses. ?We are not going to increase rates, at least for now,? Chaudhuri said unambiguously on Tuesday, adding that while some private sector banks may have raised rates, it didn?t make sense for a large bank like it to follow suit. Chaudhuri may not just be trying to sound brave when he points out that savings accounts are not operated simply for the returns but for other services too, and he?s right when he says there?s no real need to raise rates just yet. Of course, at some point, he would need to do so but SBI needn?t needlessly add to costs, especially on a huge savings deposits franchise of R3.5 lakh crore, until it?s absolutely necessary.
As an analysis by Kotak Institutional equities points out, large PSU banks, like SBI or Punjab National Bank, are at limited risk. That?s because these banks have a larger share of deposits from rural and semi-urban regions, unlike some of the private sector banks that have a larger share from the urban areas and metros; as such, an HDFC Bank, for instance, which might be more dependent on customers from the metros and urban areas, could be relatively less better off than an SBI, which commands a geographically diversified and more sticky deposit base.
In fact, contrary to the view that freeing up the savings rate at a time when the cost of money is already high may not be such a good idea, the deregulation, perhaps, is not so mistimed after all because there?s no big demand for loans right now. That?s clear from the kind of rates that SBI offers, of just 9.25% for a one-year fixed deposit, which is far below what customers could get during the peak of the last cycle. What?s more, going by the commentary of bankers, it doesn?t look like too many people are going to be queuing up for credit.
Several bankers, including Chanda Kochhar, CEO and MD of ICICI Bank, have pointed out that those individuals are not really looking to leverage themselves too much in the current situation and, moreover, project finance being disbursed relates to sanctions of the past. So, while rates will move up across banks, it?s hard to see too much churn at this stage.
shobhana.subramanian@expressindia.com