Banks likely to cut deposit rates. Will lending rates follow?
At least two state-owned banks are considering a cut in savings account deposit rates as sector struggles to contain costs due to demonetisation
Mumbai: At least two state-owned banks are considering a cut in the savings bank deposit rate—a move likely to be emulated by rivals—as the banking industry struggles to contain costs in the face of huge deposit inflows after last month’s outlawing of old high-value banknotes.
This will be the first such cut in this particular interest rate after the Reserve Bank of India (RBI) deregulated it five years ago, and could be the precursor to lower lending rates as well.
“The time has come to cut interest rates on savings deposit rates. We could expect an announcement on the new rate with effect from 1 January,” said the chairman of a mid-sized public sector bank who wanted to remain anonymous.
He said the bank was looking at an at-least 50 basis points cut from the current 4%. One basis point is one-hundredth of a percentage point.
Interest rate on savings account was the only regulated rate left after interest rates on other deposits were deregulated in 1997. In October 2011, RBI under governor D. Subbarao decided to deregulate the savings rate in the hope that a market-based rate would attract large savings from low-income households and also improve monetary transmission.
Under the new rules, banks were to offer a uniform rate on savings bank deposits up to Rs1 lakh. They were allowed to offer differential rates on deposits above that amount.
Most banks have kept the savings account rate unchanged at 4%. A few private sector lenders, including newer entrants, have experimented with higher rates to build market share.
A cut in the savings rate will have an impact on lending rate. The marginal cost of funds-based lending rate (MCLR), the benchmark lending rate, is calculated by taking into account marginal cost of funds, among other things. This marginal cost of funds includes the interest rate offered on low-cost savings and current account deposits.
With the banking system seeing a dramatic change in its liquidity position since the government decided on 8 November to withdraw old Rs500 and Rs1,000 notes, bank are finding it costly even to pay the 4% interest rate. Banks had received Rs12.44 trillion of deposits in old notes by 10 December, according to the last figure released by RBI.
It is a burden, especially at a time when lending is not taking off and banks’ fee income has also been hit owing to the government’s digital payments push.
As of 9 December, credit growth plunged to 5.8% year-on-year while deposit growth has accelerated to 15.9%.
“A 50 basis points reduction will lead to cost of funds coming down by 10-15 basis points,” said Karthik Srinivasan, senior vice-president at rating agency Icra Ltd.
A senior official at State Bank of India noted that the savings account rate of 4% was fixed when the RBI’s benchmark rate was 8%. “With rates falling to 6.25% and banks seeing a huge inflow of deposits following demonetization, we believe it’s logical to cut interest rate on savings bank deposits,” the official added.