SBI may raise saving deposit rate by up to 125 bps

Written by fe Bureau | Mumbai | Updated: Oct 29 2011, 09:20am hrs
A move which is likely to unleash competition among the banks, the State Bank of India (SBI) has hinted that it could increase interest rate on savings bank accounts by as much as 125 basis points after the Reserve Bank of India announced deregulation of saving bank rate in its second quarter review of monetray policy on October 25.

On an average...we are expecting 100-125 basis points increase in the funding cost of savings bank," said Pratip Chaudhuri, chairman, SBI.

He further said: "We would not be the first mover, adding that SBI will not be too worried as it has 34% of its total deposits in saving bank accounts due to its wide distribution network. We will have to see how other banks play it out and, then, we will take appropriate policy action, he said. In the case of deposits above R1 lakh, deregulation could lead to greater competition for household and corporate deposits, he added.

However, in our view, the measure will have limited impact on public sector banks as most of the savings bank accounts have balances below R1 lakh. In any case, all banks are already offering flexibility through schemes like MODS for savings bank customers, observed Choudhuri.At the moment, savings bank balances up to R1 lakh will attract a uniform rate of interest, irrespective of the balance, and banks can pay differential rate for savings over R1 lakh. However, other banks like IDBI Bank said they are still in the wait-and-watch mode.

I don't think we will be impacted that much and need to hike the savings rate. A small bank with limited number of breaches may need to hike its rates much more than big bank. Banks will also have to change their charges for the benefits which are given free of cost. They will also design many more short-term fixed deposits like for 10 and 20 days,P Sitaram, chief financial officer, IDBI Bank, said.Earlier this week, the RBI had deregulated the savings bank deposit interest rate with immediate effect, giving banks freedom to determine their own rates.

Immediately after the announcement, private sector Yes Bank, a relatively small player, had raised savings rate by 200 basis points to 6% Banks now offers 4% on savings bank accounts.

When asked about the impact of RBI decision on deregulation, Chaudhuri told a TV channel in an interview: I think that's (rise in interest rate on savings bank) going to be inevitable. We are prepared for some pressure on the cost of saving bank funding." By freeing the savings bank deposit rates, RBI has demolished the last bastion of the regulated interest rate regime. The RBI had earlier given freedom to banks to determine fixed deposit rates, depending on their asset-liability positions.