Savings deposits earn more; loans turn dear

Written by fe Bureau | Mumbai | Updated: Oct 31 2011, 06:04am hrs
Another round of loan rate hikes appears to have started, robbing some cheer from better returns on savings accounts. Kotak Mahindra Bank raised its base rate by 25 basis points to 10% on Sunday following the Reserve Bank of India's repo rate hike last week. HDFC vice-chairman & CEO Keki Mistry said his firm would soon take a call on rate hikes. We didnt increase our rates the last time RBI raised policy rates, he said.

Money could turn costlier across the board as non-bank finance companies and mortgage lenders review lending rates. Mahindra & Mahindra Finance CEO Ramesh Iyer said his company would take a decision early November. The latest rate hike and savings deposit deregulation may put pressure on our costs of funds and we may have to raise rates, said Iyer.

Following the deregulation of savings rates, banks quickly moved to hike rates. Kotak will offer 6% for deposits over R1 lakh and 5.5% for up to R1 lakh. Yes Bank has already started offering 6%. State Bank of India (SBI) too has hinted at a rate hike.

Until RBI freed the rate on savings accounts last Tuesday, banks were paying customers a uniform rate of 4%. Now, they must offer a uniform rate for deposits below R1 lakh and not discriminate between customers who have deposited more.

Analysts estimate that on an average, a 100 bps increase in the savings deposit rate could hurt earnings of banks by 8-14%. Mid-tier banks with a smaller share of current and savings accounts are expected to benefit more from the move while larger private sector banks, many of whom have a relative high share of Casa accounts, could see their borrowing costs going up. The bigger state-owned banks, say analysts, are unlikely to be hurt because a fair share of their deposits are sourced from rural and semi-urban areas.

It is a very big jump and provides better rates for our customers. However, there is no increase in any of the current charges and we are not changing any product parameter, said Uday Kotak, MD, Kotak group. The bank's CASA stands at 26%, of which current accounts contribute 16%.

Deregulating savings rates will not affect HDFC as we have mostly longer-term deposits, said HDFCs Mistry who believes banks are unlikely to offer higher rates as there is sufficient liquidity in the market and not too much credit offtake.