Savings rate de-regulation: Yet another uncertainty for banks

The Reserve Bank of India makes a strong case for de-regulation of savings bank deposit rates, going by the arguments presented in its discussion paper released on Thursday.

While it does point out the disadvantages of de-regulating savings bank rates — unhealthy competition and asset-liability mismatches, it has addressed these concerns in the latter part of the paper based on historical evidence. As of March 2010, savings bank accounts comprise of 24 per cent of the total deposits.

Only last year, RBI put through a change in methodology for calculation of savings bank rates, which increased the average costs of maintaining savings bank account to 3.5 per cent for banks, from less than 2.7 per cent. Now, if the savings rates are de-regulated, banks, especially public sector banks, will be subjected to higher interest rate risk on the borrowing side.

This will, in turn, increase the volatility in the net interest margins. Yes, the cost of funds plays an important role in deciding base rates for lending, but the costs will be passed on only with a lag. The reason public sector banks will be impacted more is due to their higher proportion of savings bank accounts and also their dependence on core lending business. Private banks rely more on fee income. As of December 2010 for instance, State Bank of India and Punjab National Bank derived 30 and 31 per cent of their total deposits from savings bank accounts compared with 25 per cent in case of Axis Bank.

Small private banks may benefit

Small private banks with a low CASA (current account and savings account) base may, on the other hand, benefit from the de-regulation move as they may get the flexibility to offer better rates too woo depositors. However, their ability to benefit from such a move would depend on their branch network and also services they offer to attract these depositors.

Cost of servicing these depositors nevertheless will continue to be high. Therefore, private banks would try wooing the metropolitan and urban customers compared with small ticket rural customers.

Mr Aditya Puri, Managing Director, HDFC Bank, in a TV interview, had earlier said that the customer needs to put in anywhere between Rs 7,500 and Rs 10,000 for a bank to break even on the savings account. The competition would become more aggressive when new bank licenses are issued, given they are starting from scratch on mobilising deposits.

Once deregulated, interest rates on savings bank accounts may not only increase but decrease too, depending on the liquidity and rate situation. For instance, during the falling interest rate and excess liquidity scenario in late-2009, average call money rates dropped as low as 3 per cent, while the current rates are 6.9 per cent. This will increase or decrease the movement in the rates by a huge margin. Such high volatility in interest rates would also tend to increase the volatility in earnings for banks.

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