Savings bank deposits might fetch lower returns. For the first time since rates on these were deregulated in October 2011, leading banks are considering reducing it, as the interest rate cycle has started showing a downward bias.
Bankers say a cut in the savings bank rate is needed to protect net interest margins (NIMs).
“There is a distinct possibility banks may cut savings bank interest rates. The fact of the matter is if the whole interest rate structure comes down and you don’t cut the savings bank rate, your margins would be impacted,” said Aditya Puri, managing director, HDFC Bank.
To protect NIMs, banks have already cut fixed deposit rates on retail term deposits across maturities.
For many quarters, HDFC Bank has maintained a net interest margin of 4.15-4.35 per cent. Now that the second-largest private sector lender is considering a cut in its base rate (the benchmark rate to which all loans are linked), its margins would be under pressure if the cost of funds do not decline.
HDFC Bank’s margins are boosted by the high proportion of low-cost deposits. The bank’s current account and savings account deposits account for 46 per cent of total deposits, one of the highest in the sector.
Most commercial banks pay four per cent interest on savings bank deposits, though some offer more.
YES Bank offers seven per cent on deposits of more than Rs 1,00,000, while Kotak Mahindra Bank and IndusInd Bank offer six per cent. These banks had raised the interest on savings deposits after the Reserve Bank of India (RBI) had deregulated these rates. This had helped the banks garner more of these deposits.
J Moses Harding, head (asset liability committee and economic and market research), IndusInd Bank, says savings bank rates would fall after a rate cut by RBI or a shift of system liquidity from deficit to surplus, as this would shift the operative policy rate from the repo rate to the reverse repo rate.
In its last monetary policy review, the central bank had reduced the cash reserve ratio (the proportion of deposit banks have to keep with RBI as cash) by 25 basis points and this is expected to ease liquidity. The Street expects RBI to cut key policy rates by an additional 50 basis points this financial year. In April, RBI had cut the repo rate by 50 basis points but had maintained a pause in the next three policy meetings, as inflation remained above its comfort levels.
Some bankers do not expect savings bank deposit rates to fall immediately.
“It doesn’t look like savings bank deposit rates would start falling in a hurry. The falling interest rate cycle has just begun. RBI has cut rates once and it seems reluctant to cut again. If we have a prolonged slowdown in the economy, we may see rates falling. It depends on how economic growth pans out,” said Rajat Monga, group president (financial markets) and chief financial officer, YES Bank.
Nitin Chopra, head (retail and consumer banking), Ratnakar Bank, said for the savings account rate to drop, interest rates would have to fall significantly. “In the near term, this is unlikely,” said Chopra.
Ratnakar Bank offers 5.5 per cent interest for its savings bank accounts.