Savings rate cut: Decline in govt banks' deposit share may accelerate

High share of PSBs in deposits has weighed on their cost structure, which the rate cut will correct

The interest rate cut on savings deposits by the country’s largest bank, State Bank of India (SBI), would have a positive implication on its margins in the short-term.

Public sector banks’ (PSBs’) liability franchise, which has proved to be more resilient over the years than their lending business, is likely to see a decline, as depositors move their savings to banks and instruments offering higher interest rates.

Other PSBs are also likely to cut rates on savings accounts, which, analysts say, will not be a bad thing for them. “SBI may lose some of the current and savings deposits to its competitors in due course, but this is exactly what the bank wants to achieve, given the poor loan growth 

in the last few years. A steady rise in deposits — in the absence of loan growth — was eating into the bank’s interest margins, and a rate cut on savings deposits may help cushion that blow in the short-run,” says Dhananjay Sinha, head-institutional research and economist, Emkay Global Financial Services. However, he doesn’t rule out the possibility of a hike in interest rates once the credit demand picks up.

In the last three years, PSBs’ share of bank deposits is down only 240 basis points (bps), after holding steady for eight years. Private sector banks have taken away some of the PSBs’ share of bank deposits by offering higher interest rates. In comparison, PSBs’ share in advances declined by 480 bps in the last three years. 

One basis point is one-hundredth of a per cent. The government-owned banks’ share of incremental bank deposits declined to an all-time low of 32.4 per cent in FY16 and recovered to 45.4 per cent last fiscal year in the wake of demonetisation. The decline was led by savings account deposits, where PSBs’ share declined by 320 bps in the last three years to an all-time low of 78.7 per cent at the end of FY17.

Together, PSBs were sitting on total deposits, including savings and term deposits, worth around Rs 74 lakh crore at the end of March this year, up 4.2 per cent over the last fiscal year. Nearly two-thirds of these deposits are savings and current account deposits.  

In all, deposits accounted for 82.5 per cent of all liabilities or source of funds for government-owned banks last fiscal year, up from 81.6 per cent in FY16, but down from a decade high of 85.1 per cent at the end of March 2012. In comparison, deposits accounted for 72.2 per cent of the private sector banks’ liabilities last fiscal year, up from 69.6 per cent in FY16, but down from high of 75.3 per cent at the end of FY11.

Credit rating agencies say the move by the country’s largest lender is a corollary of monetary developments after demonetisation. “Note ban swelled bank coffers with low-cost current and savings deposits pushing down their lending rates. These deposits are now being withdrawn, putting upward pressure on the banks’ marginal cost of funds-based lending rate,” says Karthik Srinivasan, senior vice-president at rating agency Icra.

According to him, the 50-bp interest rate cut in savings deposits may help SBI maintain its status as the most competitive lender in the market.

SBI reported a decline in advances last fiscal year at the group level for the first time in many years. Advances were down 5.1 per cent on a year-on-year (YoY) basis last fiscal year, as many of its erstwhile associates (since now merged with the parent) shrunk their loan book.

This was in line with the trend visible in other PSBs, which together reported a decline in fresh advances for the first time in at least 20 years last fiscal year. The combined advances by the 21 listed PSBs was down 2.5 per cent last fiscal year, as a majority of the banks shrunk their loan book over fears of bad loans and dearth of capital.

In comparison, private sector banks continued to grow their loan book albeit at a slower pace. Their combined advances were up 14.9 per cent in FY17, down from 22.5 per cent YoY growth in FY16. In a way they are filling the space that PSBs vacated. Analysts say a combination of lower accretion of low-cost deposits and inadequate capital infusion by the government will hamper their ability to grow the loan book.