Top bankers said the rate war among banks, that has pushed up interests on deposits to as much as 9-9.5%, has increased the cost of deposits for lenders.
Anil Khandelwal, chairman and managing director, Bank of Baroda (BoB), said higher rates could increase the cost of deposits for banks by 1-2%. The cost of deposit for many banks worked out to about 4.5-5% last year.
Banks get to collect low cost deposits by way of savings and current accounts. While banks do not pay any interest on current accounts, the interest on savings account is only 3.5%. He said 40% of total deposits of BoB are low cost whereas the ratio for the banking industry in general could be about 35%.
Although banks offer a higher interest rate on time deposits, their cost goes down sharply because of low cost deposits in the form of savings and current accounts.
According to Kishori Udeshi, a former Reserve Bank deputy governor, and chairman, Banking Codes and Standards Board of India, banks effectively pay only 2.8% on savings accounts, and not 3.5% as stipulated, since interest is payable on the minimum balance in the account between the 10th and 30th day of a month.