Though the overall tone and content of the discussion paper on deregulation of savings rate indicate that the RBI is veering towards deregulation, analysts believe that the new regulatory event is unlikely to meaningfully change the market structure of the domestic banking sector. Price-based competition for savings deposits in the event of deregulation will result in narrower net interest margins (NIM) for the incumbent public sector banks (PSBs) and private banks, analysts said.
In a rising interest rate environment and an cut-throat deposits market, price-based competition for savings deposits is bound to raise funding costs for Indian banks.
Deliberately simplified assumptions to ensure uniformity indicate a 10-15 basis point hit on NIMs in case of a 50bps increase in savings deposit costs for large PSBs and private sector banks (6-14% earnings impact) since savings deposits form a dominant portion of their deposits base (between 20-30%).
However, the regulatory event is unlikely to modify the competitive structure of the Indian banking system.
?We expect the large banks to retain their dominance in the banking system with new banks and late entrants competing more aggressively for these deposits,? said an analyst.
There will be weaker NIMs (narrower by 10-15 basis points) and earnings (6-14% earnings impact) for the incumbent PSBs and the large private sector banks in the event of a deregulation. Particularly, PSBs will need to more actively manage their funding needs as deregulation will lead to hitherto unknown price based competition for savings deposits.
Bankers said savings deposits with low balances would imply high transaction costs, prompting banks to raise minimum balance requirements.
DL Rawal, CMD of Dena Bank, said he didn?t favour deregulation in savings rate for three reasons. First, the current situation is not the right time to go for it as the proposed move may compel banks to withdraw a number of facilities being provided by them to the small customers of the bank in forms like issuance of free cheque book and passbook. ?Rather, we may think of charging for these services in future. It all will affect small customers and it may also result in asset liability mismatch,? he said. Secondly, banks currently participate in infrastructure projects to the extent of 80-90% as the deposits are stable. ?If the deregulation happens, banks will not be able to go for infra funding,? he cautioned.
Thirdly, banks are opening rural branches in a big way as part of the ongoing financial inclusion programme. In case interest rates on small savings go up due to the deregulation, viability of these branches will come under scanner, he said.
Ramnath Pradeep, CMD of Corporation Bank, said, ?Banks are spending a lot in a number of government-run schemes and they are getting compensated for that expenses by paying less interest rates on small savings bank accounts. The situation is definitely not ripe to deregulate the saving rate,? he said.
However, M Narendra, CMD of Indian Overseas Bank, said, ?At a time when inflation is firming up, the public should also get better interest rates on small savings. The rate of interest on such accounts can be deregulated, but to an extent. But appropriateness of time was an issue,? he said.
A Crisil report has said that if RBI goes ahead and deregulates savings account deposit rates, it would enhance competition amongst banks to garner relatively low-cost savings deposits.
?Increase in savings interest rate from 3.5% to 4% will pull down NIMs for banks by around 10 basis points. The impact would be higher for banks with higher proportion of savings accounts in their deposit mix,? Ajay Srinivasan, head ? Crisil Research, said.
Banks would attempt to partly offset the resultant increase in costs by levying higher transaction charges. The larger banks are well positioned to handle any such move towards deregulation due to their strong customer relationships and superior reach.