Central bank frees last mandated rate

Central bank frees last mandated rate

Mumbai: The decision by the Reserve Bank of India (RBI) to allow banks to determine interest rates on savings accounts had an almost immediate impact, with private sector lender Yes Bank Ltd moving quickly to take competitive advantage of the reform initiative.

Yes Bank increased the rate it pays on savings accounts by two percentage points to 6%. The bank also became the first to hike its lending rate by increasing the base rate, below which it cannot offer loans, by a quarter of a percentage point to 10.5%.

Rana Kapoor, founder, managing director and chief executive officer of Yes Bank, called it a “red-letter day" for banking in the country.

“It is the single biggest reform, post-economic reforms (1991), in India, and outstanding for the customer because it will make rates market-determined and hence customer-friendly," he said. “We have been preparing for this move for the last six months and are exceedingly prepared in terms of products and services."

“However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit," RBI said, adding that operational guidelines for savings rates will be issued separately.

RBI also said banks will have to implement the 10 action points that were adopted at the annual conference of banking ombudsmen in Mumbai in September. These action points are aimed at improving customer service and include the ending of penalties on the early repayment of floating rate home loans.

The move to deregulate the savings rate follows a discussion paper that invited comments on such a move in April.

“RBI has examined the suggestions received and weighed the pros and cons of deregulation of the savings bank deposit interest rate," the central bank said. “On balance, it is felt that the time is appropriate to move forward and complete the process of deregulation of rupee interest rates."

Customers currently earn 4% interest on savings account deposits—RBI raised the rate by 50 basis points (bps) from 3.5% in the annual policy review in May, the first time it had done so in eight years.

The move has been cheered by small banks with a lower savings account base.

With Yes Bank’s savings accounts constituting less than 2% of its 44,076 crore deposit base, it makes sense for the bank to raise rates to attract low-cost retail deposits and reduce the cost of funds, which has increased to 8.5% from 6.5% last year.

Yes Bank’s stock gained the most among banks on Tuesday. It rose 8.81% to close at 306.30 amid a 1.86% rise in the Sensex, which closed at 17,254.86 points.

But the 14-share Bankex fell 1.2% to 10,919.40 points, dragged down by the stocks of bigger banks with large savings account deposits. State Bank of India (SBI) and HDFC Bank Ltd fell as investors interpreted the RBI move as leading to higher costs for these banks.

Savings accounts constitute 30%, or 69,017 crore, of HDFC Bank’s total deposit base of 2.3 trillion.

Deregulation will lead to an increase in bank charges, said Aditya Puri, managing director of HDFC Bank, who was opposed to the move.

“The more affluent already park their excess deposits in fixed deposits," he told reporters. “But banks are commercial entities and have to raise funds from the market. This will definitely lead to hike in charges."

HDFC Bank fell 3.17% to 468.75, while SBI dropped 3.52% to 1,840.45.

SBI chairman Pratip Chaudhuri said there was no immediate plan to raise the savings deposit rates. “As of today, deposits are higher and there is plenty of liquidity, so there is no plan," he said. “But you must remember rates can even go down now."

The banking system holds a total 56.24 trillion in deposits, according to RBI data as of 7 October.

SBI controls 9.5 trillion of deposits, the most among Indian banks, 60,428 crore of which is in savings accounts.

“Banks will work out their product strategies to ensure stability of liability franchises and appropriate management of the overall cost of intermediating savings and providing banking services," said Chanda Kochhar, managing director and CEO of ICICI Bank Ltd.

If interest rates on savings accounts move up by one percentage point, then the additional amount that all banks put together need to pay will be about 14,469 crore, according to a post-policy report on the RBI move by Delhi-based SMC Global Securities Ltd.

“Assuming a 1% hike in savings bank accounts, the impact of this deregulation on interest rates can be quite serious on banks such as Bank of Maharashtra (where profits can fall by 52%), Development Credit Bank Ltd (by 37%), United Bank of India (by 35%), Dhanlaxmi Bank Ltd (by 34%), SBI (by 21%), etc.," SMC said. “To handle this scenario, there is a good chance that going forward, banks will focus on garnering current bank accounts."

Savings bank interest rates are likely to rise from current levels, said Murli Gopal, analyst at Brics Securities Ltd.

“Banks will fine-tune their products like introducing minimum balances and no-frill accounts," he said. “But I think for now, the market has overreacted because I do not see customers moving from one bank to another just for a few bps extra. It won’t turn the world upside down."

Competition will increase for savings deposits of 1 lakh and above, especially in urban and metropolitan areas, which constitute around 60% of the banking system’s savings deposits, Crisil said in a note.

The deregulation will increase depositors’ interest income by around 9,000 crore. It expects the average interest rate on savings accounts to increase by 50-100 bps from 4% over the medium term. Banks’ return on assets may drop by an additional 5 bps, Crisil said.