The Reserve Bank of India (RBI) decision to deregulate savings bank deposit rates could shave off nearly 13% from the profits of India?s banks if they offer even 1 percentage point more on deposits to their customers. The prospect alarmed investors, with the BSE Bankex sliding 1.20% on a day the benchmark Sensex rose 1.86%. However, the move, which was strongly opposed by banks, could benefit those with a smaller share of cheaper current and savings accounts (Casa).
India?s banks collectively posted R1,12,612 crore in profit before tax in 2010-11. SMC Capital calculates that a 1 percentage point rise in rate could lead to an additional outgo of R14,469 crore, reducing the profitability of banks by a steep 12.85%.
?Already, banks are under pressure with slow growth in loan books and a high interest rate cycle. In that backdrop, this deregulation on savings bank accounts will be a new bullet for the banking system,? SMC said in a report. According to SMC, a1 percentage point rate hike will lead to 20.7% fall in profit for State Bank of India, 13.99% for State Bank of India and 10.65% for HDFC Bank. Not surprisingly, shares of all three banks fell on the BSE.
Private sector Yes Bank was quick to announce a 2% increase in savings rate from 4% to 6%. Earlier in the day, the bank?s share closed up 8.81%.
Bankers had been opposed the move, fearing that freeing savings accounts rates would lead to a disruption in the marketplace driven by mindless competition, pushing up the cost of funds. Earlier this year, the RBI had upped the rate on savings accounts to 4% with a view to offering customers a better return at a time of high inflation. The raise had driven up the cost of funds by about 10-15 basis points. Although their margins could come under some amount of pressure, bankers are being brave about the move, acknowledging that if a couple of banks up rates, others may have to follow.
?We believe the move to deregulate savings bank rates won’t be that disruptive as deposits are ‘sticky’ and not very ‘interest-rate sensitive’, BA Prabhakar, ED at Bank of
India said. ?We don’t see any big impact from this move, though banks with low CASA deposits may raise rates by 25 basis points.?
Said Aditya Puri, MD, HDFC Bank: ?A lot is being made out of savings bank interest rates. Just focus on the words. The savings account is largely a transaction account; it’s not a vehicle to earn you interest. The difference you will gain on, say an amount of Rs 10,000 and a 1% higher rate, is Rs 100 for the year or Rs 8 per month. How much are you willing to sacrifice for that? Banks also are commercial organisations. We also have to raise money from the capital market, so we will examine. It’s a definite upward bias on charges.?
Romesh Sobti, MD and CEO, IndusInd Bank said: ?The move won’t be disruptive as savings bank deposits are sticky.? RK Bakshi, executive director of Bank of Baroda, added that the impact of deregulation on margins will depend on how much banks raise interest rates. ?There isn’t much scope for increasing savings rate from current levels for accounts that have less than Rs 1 lakh,? he observed.
Analysts point out that state-owned banks don’t need to worry too much since they are trusted more by customers due to their government ownership. State Bank of India and HDFC Bank have the highest CASA ratio in the banking industry. ICICI Bank and Axis Bank have CASA ratios of about 42%. Other big state-owned lenders like Bank of Baroda and Punjab National Bank have CASA ratio of less than 40%.
The central bank has been convinced for some time now that freeing interest rates on savings accounts would neither result in unhealthy competition between banks nor would it create asset-liability mismatches (ALM), the two big concerns raised by banks. In a discussion paper on the ?Deregulation of the Savings Bank Deposit Interest Rate?, it had argued that that a fixed rate for savings accounts has impeded effective monetary policy transmission. For monetary policy transmission to be effective, all rates need to move in tandem with policy rates, whereas in reality, the correlation coefficients of the savings deposits rate with both the call money rate and the lending rate has been lower than those of term deposits.