The last frontier of interest rate regulation crumbled today
when banks were granted the freedom to fix the savings bank rate.
The savings bank rate —currently capped at 4 per cent — has
been the only rate in the retail banking industry that the RBI has set since
October 1997 when bank deposit rates were fully deregulated.
The rate revolution was announced even as the RBI raised its
benchmark interest rate — the repo — by 25 basis points to 8.5 per cent.
Reserve Bank governor Duvvuri Subbarao also signalled the
13th rate increase since March 2010, which was widely anticipated, could be the
last in the current rate cycle even as he trimmed the growth forecast for the
Indian economy to 7.6 per cent from 8 per cent earlier.
But the big buzz of the day was the speculation over the
possible reconfiguration of the banking landscape that the saving bank rate
deregulation could bring about.
While deregulating the interest rate, the RBI stipulated
that each bank would have to offer a uniform rate of interest on savings bank
deposits up to Rs 1 lakh. They could offer a higher rate if the average cash
balances in these accounts stay above Rs 1 lakh.
“If there’s any rate war, it will be to attract depositors
who park more than Rs 1 lakh in their savings bank account,” said Amitabha
Guha, non-executive chairman of South Indian Bank. “High net worth individuals
on an average keep Rs 5 lakh to Rs 10 lakh in their savings bank accounts. All
banks will now vie for this pool of depositors.”
Privately-owned Yes Bank grabbed the opportunity to ignite a
rate war by offering 6 per cent interest in an effort to wean away accounts
from established players like the SBI and HDFC Bank that have built up vast
troves of cheap cash that reside in savings bank accounts.
“This path-breaking regulation will enhance and protect
savings returns from the brunt of persistent inflation,” said Rana Kapoor,
founder and managing director of Yes Bank. “The alignment of savings rate to
the market rates will accelerate greater financial inclusion of the unbanked
and under-banked population.”
Savings bank accounts have been one of the cheapest source
of cash for the big boys of banking. The big players have over 25 per cent of
their total deposits in the form of cash balances in savings accounts. Yes Bank
– the latest rate warrior – has only about 2 per cent of its deposits in the
form of cash balances in savings bank accounts.
Until the savings bank rate was revised to 4 per cent in
May, banks forked out just 3.5 per cent on savings bank accounts — a rate that
remained unchanged for eight years since March 2003.
The decision to deregulate the savings bank rate — an idea
that was floated early this year in a discussion paper floated by the banking
regulator – creates a situation where the humble savings bank account can give
liquid mutual funds a run for their money at a time when the stock market
returns have tumbled by over 15 per cent from year-ago levels.
Yes Bank’s sudden move appeared to fly in the face of
several banking mavens who have been suggesting for some time that the
deregulation of the savings bank rate won’t have a great impact on the
industry.
They didn’t seem to have changed their views after Yes
Bank’s rapier thrust.
“We are not in a hurry to raise the savings bank rate from
the current level of 4 per cent,” said SBI chairman, Pratip Chaudhuri. “We will
see how it (deregulation) plays out. Unless there are other competing
pressures, the savings bank rate at SBI will continue at 4 per cent.”
Chanda Kochhar, managing director and CEO of ICICI Bank,
said: “Some banks will rejig their rates. But we would prefer to watch its
implications on customer behaviour before taking our next step.”
However, Aditya Puri, managing director of HDFC Bank, seems
to have subtly revised his stand after the announcement. Recently, he had said
the savings bank rate could even dip from the current level of 4 per cent after
deregulation.
On Tuesday, Puri came up with a cryptic comment: “If there
is a one per cent increase in the savings bank rate, banks’ margins could take
a maximum hit of 0.25 percentage point.”
But not everyone seemed to agree with the top bankers in the
country. “I expect the savings rate to rise to 6 per cent going forward,” said
R.K. Bansal, executive director of IDBI Bank.
B.A. Prabhakar, executive director of Bank of India, said
the rate would go up to 4.75 to 5.52 per cent and stabilise around those levels
after a while.
Much will depend on whether the rate war sparks a churn in
savings bank deposits.
At the end of March, total savings deposits in the banking
system stood at Rs 13,77,288 crore, or 26.5 per cent of total deposits. The
household sector, which parks 13 per cent of its financial assets in savings
bank accounts, is the largest contributor to the cheap source of funds for
banks in the country.
Given the current rate (4 per cent calculated on a daily
balance basis) prescribed by RBI, banks pay roughly Rs 48,000 crore a year as
interest on savings bank deposits. In contrast, a one-year bank fixed deposit
earns about 7 per cent interest.
Other bankers saw a flip side to the overture from the
would-be rate warriors. They expected banks to offset some of the losses by
asking customers to pay higher charges for banking facilities such as cheque
books and money transfers. ATM withdrawals above a certain number of
transactions could also invite charges.
“Service charges will go up as the cost of fund increases,”
said Romesh Sobti, managing director and CEO of IndusInd Bank.
Source: http://telegraphindia.com/1111026/jsp/frontpage/story_14669880.jsp
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