Smaller banks launch savings deposit rate war.
Within a week of the savings bank deposit rate deregulation, banks with a lower share of the low-cost deposit have wasted no time in grabbing the opportunity with both hands. The savings account and current account deposits constitute the low-cost deposit of banks.
Three private sector lenders, YES Bank, Kotak Mahindra Bank and IndusInd Bank, have already increased the rate by 150-200 basis points (bps), with the last two offering higher interest rates to depositors maintaining a balance of more than Rs 1 lakh. Observers say more banks, especially public sector entities which have a 70 per cent market share, will also join the battle to get more cheap deposits.
| AT WHAT PRICE? Impact on NIM (in bps) if savings deposit rate is increased by | ||||
| 50 bps | 100 bps | 150 bps | FY11 NIM (%) | |
| Axis Bank | 12 | 24 | 36 | 3.65 |
| HDFC Bank | 15 | 30 | 45 | 4.20 |
| ICICI Bank | 15 | 29 | 44 | 2.60 |
| Allahabad Bank | 13 | 26 | 39 | 3.38 |
| Bank of Baroda | 10 | 21 | 31 | 3.12 |
| Punjab National Bank | 15 | 29 | 44 | 3.96 |
| State Bank of India | 19 | 38 | 57 | 3.32 |
| NIM: Net interest margin Source: Kotak Securities | ||||
Ajai Kumar, chairman and managing director of Corporation Bank, said the bank may take a call on increasing the rate in the next 8-10 days. According to bankers, all eyes are on the largest lender State Bank of India, which is expected to announce its decision shortly. A Krishna Kumar, managing director of SBI, said in New Delhi on Monday the bank had set up a committee to examine the implications of the savings bank rate deregulation and added it may increase the rate.
| WHAT’S COOKING? STATE BANK OF INDIA Decision expected shortly YES BANK Increased rate 200 bps, to 6% KOTAK MAHINDRA BANK Increased rate 150 bps for balance up to Rs 1 lakh (to 5.5%) and 200 bps for more than Rs 1 lakh (to 6%) INDUSIND BANK Increased rate 150 bps for balance up to Rs 1 lakh (to 5.5%) and 200 bps for more than Rs 1 lakh (to 6%) CORPORATION BANK Decision in the next 8-10 days CANARA BANK No decision yet DEVELOPMENT CREDIT BANK Decision in a week’s time |
According to SBI officials, the additional annual interest burden would be Rs 1,500 crore if the bank raised the savings rate 50 bps. Around 38 per cent of SBI’s total deposits of Rs 9.5 lakh crore come from savings accounts. The bank is expected to take a hit of 19 bps on its margin if it raises the savings rate 50 bps to 4.5 per cent. According to an estimate by Kotak Securities, SBI’s net interest margins would see a contraction of 57 bps if it raised the savings bank rate 150 bps.
SBI had reported a net interest margin (NIM) of 3.62 per cent during the first quarter of the financial year. For 2010-11, the bank’s NIM was 3.32 per cent. Canara Bank chairman and managing director S Raman said the bank had not taken a decision on increasing the savings bank account rate. “We will wait and watch the other public sector banks before taking any decision,” he said. Raman added the additional interest expense for the bank would be Rs 320 crore per annum for a 50 bps rise.
Private sector lender Development Credit Bank also said a decision may come in a week’s time but it was looking at SBI for a cue. “We will take a week’s time to take a decision on the revision of the interest rate for savings accounts as we will first analyse its implications. Also, we want to see how bigger players like SBI react to the deregulation,” said Murli Natrajan, managing director and CEO of the bank.
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While customers will benefit as banks start offering higher returns, some banks have indicated that since liquidity is comfortable fixed deposit rates could be lowered to compensate the higher interest payment arising from savings bank balances.
“Reduction in some of the term-deposit rates could also be a possibility in case of banks that have surplus liquidity. But such a move will depend on a number of factors like the liquidity situation, rate of growth in advances and deposits. I think it is too early to take a call on whether banks can cut their fixed-deposit rates,” said Chanda Kochhar, managing director and CEO, ICICI Bank.