Higher transaction charges may offset benefits of savings bank rate deregulation

The deregulation of interest rates on savings bank deposits announced by the Reserve Bank of India in its second quarter review of monetary policy on Tuesday might be a boon for depositors as they will stand to gain a higher interest rates on such accounts.

However, a part of the gains might be offset by the increase in transaction costs as banks will try to pass on their increase in cost of funds to the customer.

The central bank has in its policy statement advised banks to offer a uniform interest rate on savings bank deposits up to Rs one lakh irrespective of the amount in the account, however, for deposits over Rs one lakh, a bank can provide differential rates of interest.

Savings bank accounts currently attract an interest rate of four per cent. The extent of the hike will depend upon the structure of deposit accounts of individual banks and the category of customers.

The term deposit rates in the time bucket of 6 months-to-one year is currently hovering around 9-9.25 per cent. Though the interest rates on savings account might not be at par with the term deposit rates, however, it could inch up by 1-2 per cent, senior bank officials said.

A higher interest rates on savings account will attract a higher operational or transaction fee, particularly for deposits less than Rs one lakh. “Savings bank deposits are operative accounts.

So banks might limit the number of annual transactions and jack up the cash handling and cheque return charges in order to make good for their increase in cost of funds.

Alternatively, banks might decide not to tinker too much with rates and keep its operative costs intact,” a senior bank official said.

However, for deposits over Rs one lakh, banks might come out with innovative customised products in the form of higher interest rates, concessions on retail loans and flexi deposit schemes and lower transaction charges.

Impact on banks' profitability

The deregulation will push cost of deposits of banks and exert pressure on profitability.

The impact will be more pronounced for banks which have a good chunk of savings bank deposits. “In case a bank hikes interest rates by about two per cent then it could have a cost impact of 15-50 basis points,” said Mr R K Bansal, Executive Director, IDBI Bank.

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