The Reserve Bank of India (RBI) on Tuesday raised the savings bank interest rate by 50 basis points to 4 per cent — a move that would provide some relief to depositors. With average inflation in the last financial year hovering around 9.4 per cent, depositors have been earning negative returns from savings bank accounts.
“In the recent period, the spread between the savings deposit and term deposit rates has widened significantly. Therefore, pending a final decision on the issue of deregulation of savings bank deposit interest rate, it has been decided to increase the savings bank deposit interest rate from the current 3.5 per cent to 4 per cent with immediate effect,” RBI said in its annual monetary policy document.
A rise of 50 basis points would translate into an additional cost of around Rs 5,500 crore for banks and this is expected to hit the spreads between cost of deposits and yield on advances of banks. One basis point is one-hundredth of a percentage point.
| IMPACT | |
| Banks | Hit on NIMs |
| Punjab Nat Bank | -14 bps |
| State Bank of India | -12 bps |
| HDFC Bank | -12 bps |
| Union Bank | -11 bps |
| Bank of Baroda | -11 bps |
| Bank of India | -10 bps |
| ICICI Bank | - 9 bps |
| Axis Bank | -9 bps |
| BPS: basis points Source: IIFL | |
Bankers said the increase in the savings bank rate would translate into a 12-15 basis points increase in total costs and going forward, if the interest rate on savings continues to rise after deregulation, then they would have to pass on the cost. “In the long run, if interest rate on savings bank deposits keep rising, banks would have to increase the transaction charges like in advanced countries,” said Aditya Puri, managing director, HDFC Bank.
Savings bank interest was kept unchanged at 3.5 percent since March 2003. Savings bank deposits account for nearly 22 per cent of the total deposits portfolio of the Indian banking industry, which is estimated at over Rs 53 lakh crore.
“Because of the 3.5 per cent interest rate, people were keeping around Rs 9.5 lakh crore at home in cash. People said the 8 per cent return from fixed deposits were not worth it, because of the long-term nature of these deposits. Now, with the 50 basis points increase in the savings deposit rate, there is some compensation,” said State Bank of India Chairman, Pratip Chaudhuri.
Last week, RBI had initiated a discussion on the deregulation of savings bank rate and had sought feedback from the industry and the public on the matter. While RBI had argued such a move would increase the transmission of the monetary policy mechanism, it had also put forward concerns like unhealthy competition among banks and asset liability mismatches. However, the regulator had hinted that the advantages outnumber the disadvantages.
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Banks have so far opposed deregulation of savings bank deposit, saying such a move would fuel instability. RBI, however, argued when interest rates on term deposits were deregulated in 1997, the argument of unhealthy competition was not supported by data, since there was no evidence of unusual spreads in term deposits. RBI said if deregulation of interest rate for term deposits, which constituted 60 per cent of deposits, did not have any destabilising impact, the deregulation of interest rate for savings deposits, which constitute about 22 per cent of total deposits, would not have a significant adverse impact on the system.
Shifting to a market-driven savings bank rate would result in asset-liability mismatches. Though savings bank deposits represent short-term savings which can be withdrawn on demand, a large part of savings deposits is treated as core deposits, which, together with term deposits, have been used by banks to increase their exposure to long-term loans, including infrastructure loans.