It has been over a year since the Reserve Bank of India deregulated interest rates on savings bank account. IndusInd Bank Ltd is one of the few banks that has raised this rate. Romesh Sobti, managing director and chief executive officer, in a discussion with Mint Money talks about how the 6% interest rate strategy works for the bank and how is the banking industry tackling mis-selling of insurance products.
Why did IndusInd Bank increase interest rate on savings bank deposit?
As part of our business growth, we decided to focus on both retail and corporate clients. Now to get into retail you need to acquire customers. Till October 2011, interest rate on savings account never played a role in attracting customers as it was regulated and till then we were focusing on product innovation only. Suddenly when deregulation happened, the interest rate became a tool to acquire customers. It gave us a boost and hence we increased the savings account interest rate to 5.5% for below Rs.1 lakh and 6% for above Rs.1 lakh. This has helped us escalate our customer base by 10%.
What is the math behind this?
The math behind this is quite simple. In our current account savings account (CASA), savings account base is relatively smaller. For large banks that have a huge savings account base, even an increase of one percentage point in interest rate will cause a sizeable hit to their interest cost. But for banks with smaller savings account, such as IndusInd Bank, it is a relatively smaller hit.
It also means that we can replace an expensive fixed deposit (FD) by a relatively cheaper savings account.
Now apart from the interest cost, you also need to factor in the transaction cost. A savings account customer brings in high transaction cost. So a cost of a savings bank account is much more that 6%. It could be 7-8% for the bank because you could have 1.5% transaction cost as you offer services such as cheque book, debit card, Internet banking and bill payment facilities. Besides this, a savings account customer will also withdraw cash. Now all these are intrinsic costs. Despite all this, the math works out better compared with FDs.
When can we expect the interest rates on savings account to fall?
When the interest rate for, say, 180- to 365-day FD falls below the savings bank interest rate, then you will see the savings account interest rate fall. Otherwise somebody has to be silly to give a savings bank rate higher that FD rates. The arithmetic is very clear: your cost of the savings account plus the transaction cost. Assume one-year FD rate falls below 7% and if you look at your savings rate of 6% and the transaction cost, here savings account turns out to be expensive for a bank than an FD. This is because the transaction cost of FD is practically nil. The higher interest rate on savings account gets us new customers and they can be used to cross-sell other products.
Coming to cross-selling, why would anyone buy insurance from you?
You will take insurance from me because you have taken a two-wheeler loan from me. Now you take a loan from me because you have a savings account with IndusInd Bank. You can start a relationship with a bank with one product. For instance, if you come to me for a home loan, I will source it to you from the Housing Development Finance Corp. Ltd as we have a tie-up with them. However, you will buy a home insurance from me. Again the equated monthly instalment will be paid from IndusInd Bank and hence you will open a savings account.
In the process how do you tackle mis-selling, say, in insurance products? Also how does a bank incentivize for selling insurance or mutual funds?
I agree mis-selling in insurance definitely happens either through banks or agents. The question is how do you minimize it, if not eliminate it. So we train our staff and create compliance. Just as there is an incentive for selling well, there are punishments for mis-selling. Mis-selling means the banking executive loses his job. Every bank has a process where the salesperson is given targets which lead to incentives and if you look at it, insurance income forms a very good part of the total fee income of the bank. This can cause pressure to sell. Hence there is a need to monitor targets. We ensure that things such as free-look period are conveyed by the bank to the consumer. However, the percentage of mis-selling is still very small through banks. We started selling insurance and mutual funds five years ago and we have been adding more products. We normally sell our insurance or mutual fund products to our existing customers. So cross-sell is the most critical measure of our success at the branch level and we measure the branch manager, the customer service executive and the relationship manager based on sales of all the products.