Competition to intensify on savings bank deregulation

The Reserve Bank of India's recent move to deregulate savings bank rate is likely to result in higher cost of deposits and consequent pressure on margins for banks in the current high interest rate scenario. Savings bank rates have already risen from 2.7 per cent in March 2010 to 4 per cent now, resulting in higher costs for banks.

Banks in India held 26 per cent of their total deposits in the form of savings bank deposits as of June 2011. Assuming the savings bank deposit rates of these banks rise by 1 percentage point, profits before provisions and taxes will be lower by 9.3 per cent (based on FY-11 profits) if they do not pass on the deposit rate hikes to borrowers. While this will be the case in the current high interest scenario, linking rates to market forces will, however, reduce the cost when interest rates decline.

PSBs less hurt

On the face of it, a savings bank rate hike will seem to hurt public sector banks (PSBs) more, given that lending remains their core business and that needs to be funded with more deposits. Private banks, on the other hand, receive a good part of their revenue from fee income sources as well. Savings banks have accounted for a major portion of PSB deposits (76 per cent of total savings bank deposits are held by PSBs).

However, the impact may not be as much as feared for the following reasons: One, PSBs cater to small-ticket savings bank depositors. Even if they don't hike rates as aggressively as private banks, their balances can be expected to remain somewhat intact. The average savings bank ticket size of PSBs as of March 2010 was Rs 22,000 as against Rs 36,600 of all private banks.

With most private and foreign banks demanding high average balances, on savings bank accounts, an exodus of low-ticket deposit holders from PSBs may not be significant in number. Two, savings bank deposits, unlike term deposits, are about convenience and accessibility especially in semi-urban and rural areas where the presence of PSBs is high. This would also reduce the pace of shift of savings bank accounts from PSBs to private banks.

However, private banks such as Axis Bank and HDFC Bank which have enjoyed lower cost of funds so far will now have to compete more aggressively now with peers to retain their cost structure. New banking licences would also add to the cost pressures of existing banks.

Interestingly, new banks such as YES Bank, IDBI Bank, Indusind Bank and Kotak Mahindra Bank may stand to benefit from a hike in saving bank rates. Given their relatively small branch network and late entry, these banks already pay more for their deposits.

The average cost of funds in the case of YES Bank, for instance, in the six months ending September was 8.6 per cent. The bank raised its savings bank rate by 2 percentage points to 6 per cent, post the policy. Even at this rate, its incremental flows from savings accounts from here on, will bear a lower cost than its average cost as of September.

Impact on margins

The 1.3-percentage-point-hike in savings bank deposit rates over the last 19 months has not pressured bank margins as they managed to pass-on these costs to borrowers by hiking lending rates. However, whether such a pass-through is possible once again and that too in a competitive scenario remains doubtful.

Currently deposits with a 2-3 month tenure are offered close to 6.25 per cent. Savings rate may settle slightly lower than this given the liquidity available in these products. Assuming banks follow YES Bank's example and settle for a 6 per cent rate, then the total interest outgo would be around Rs 28,000 crore or 50 basis points to the cost of funds.

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