Rise in savings deposit rate draws clients to private banks

Somasroy Chakraborty / Mumbai November 09, 2011, 0:24 IST

Only a little over a week ago, a handful of private banks had increased the interest rate on savings deposits. However, these lenders already claim the number of enquiries for opening an account with them has surged. The enthusiasm was seen not only among retail depositors; even small and mid-sized companies have expressed interest to open salary accounts of their employees with these banks.
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The response has been extremely positive, even though the hike in savings deposit rate happened recently. On the retail side, the demand is mostly coming from senior citizens who now have the opportunity to earn higher interest income on their deposits," said Rana Kapoor, founder, managing director and chief executive, YES Bank. The bank was the first in the country to raise the savings deposit rate after it was de-regulated on October 25. The private sector bank has raised its savings deposit rate by 200 basis points to six per cent. "Every day, we are getting about eight to ten enquiries from our corporate clients. The companies feel giving their employees an opportunity to earn higher interest income on salary accounts would keep them motivated," Kapoor said, adding the momentum in moping-up low cost deposits would reflect in the earnings in the third quarter. YES Banks savings deposits constitute two per cent of the bank's total deposits. Kotak Mahindra Bank had also increased the savings deposit rate and offers six per cent rate on savings deposits above Rs 100,000. It pays 5.5 per cent interest on savings deposits below Rs 100,000. "The initial response has been good, and we are seeing interest from all segments. Upper-end customers who have many bank accounts are exploring options to consolidate their bank balances with us. As a result, we are seeing balances in

many of these savings deposit accounts increasing. Also, there are enquiries from new customers who do not have accounts with us," said K V S Manian, group head (consumer banking), Kotak Mahindra Bank. Some banks however said it was premature to assess the impact of increase in savings deposit rate on their financials, but they remain confident that it will strengthen their low-cost retail deposit base over the medium to long-term. Kolhapur-based Ratnakar Bank said depositors in semi-urban and rural centres, where the penetration of investment products was relatively low, were keen to take advantage of the higher interest rate on savings deposits. The banks' metro branches have also seen a rise in customer queries on account opening. "As a result of the savings rate increase by our bank, we are indeed seeing a lot of client interest from across our footprint --- metros, semi-urban and rural," said Rajeev Ahuja, head (strategy and financial markets), Ratnakar Bank. The lender's savings deposit rate has now been revised to 5.5 per cent. "It is too early to have a definitive view and the impact of such seminal changes should to be evaluated over the medium to long term. This is a significant piece of consumer value proposition, and it would have an impact on how the savings product is marketed, and also on innovation in product features and its delivery," Ahuja said. Public sector banks and large private lenders have not revised their savings deposit rates. Many bankers feel savings deposits were primarily used for transactional purposes and a marginal difference in rates would not lead to significant migration of clients. Some bankers were also critical of the Reserve Bank of India (RBI) for de-regulating the rate at a time when economic activity had slowed and asset quality of banks was under pressure. "I have been told by some bankers that the time for de-regulation was perhaps not right, since the non-performing asset cycle is on the upswing. We all know the truth --- there never would be a completely appropriate time for such reforms," said K C Chakrabarty, deputy governor, RBI.

Will savings rate deregulation help banks? Business Standard / New Delhi November 9, 2011, 0:47 IST Not unless it is accompanied by other essential reforms, such as liberalisation of priority sector norms, but banks now have the freedom to manage their money better.

DR RUPA REGE NITSURE Chief Economist, Bank of Baroda

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Deregulation of interest rates from the liabilities side without liberalising all rates from the assets side results in a distortion The Reserve Bank of Indias (RBIs) recent move to deregulate interest rates on savings bank (SB) deposits is seemingly justified in the interest of fairness and equity, as the rate was administered at 3.5 per cent for more than eight years and then raised to four per cent in May, 2011 despite sticky inflationary pressures for more than 40 months. It was considered unfair that depositors, who provide almost one-fourth of the total stock of bank deposits, were not given any protection against rising inflation. Also, the move was deemed essential to

promote product innovation and price discovery in the long run, since deregulated SB rates might encourage banks to judiciously manage liquidity and promote efficient resource allocation.

However, the move may not fetch the desired results, since half-hearted deregulation can be worse than none at all. The deregulation of SB rates should have been accompanied with other essential reforms like the reduction in the overall resource preemption levels, liberalisation of priority sector lending norms, deregulation of other administered rates like interest rates on crop loans or export credit and so on for the creation of a fair, market-driven banking system. Moreover, interest rates on other important savings products with which bank deposits directly compete are still administered in India. For instance, interest rates on the small savings, pension and provident fund schemes of the central and state governments are not market-determined.

In the current phase of rising interest rates and increasing volumes of government market borrowings, the SB deregulation may discourage banks to undertake aggressive efforts towards financial inclusion (due to higher cost of funds) and also hamper their efforts to extend low-yielding social advances. If the administered SB rates acted as the subsidy for public sector banks, it may not be forgotten that these were the banks that lent unfailingly to low-yielding social sectors even during the global crisis years. In other Bric countries like China and Brazil, SB rates are regulated precisely for this reason. Deregulation of interest rates from the liabilities side without liberalising all rates from the assets side results in a distortion.

Let us now look at the experience of those countries in which SB rates are deregulated for quite some time. In countries like South Korea, Taiwan, Singapore and Malaysia, SB rates have settled at extremely low levels over the period of time. For instance, at present, the SB rate rules around 0.10 per cent in South

Korea, 0.31 per cent in Taiwan, between 0.25 and 0.35 per cent in Singapore and between 0.40 and 0.70 per cent in Malaysia. Even in India, once interest rates start easing, the competitive pressures will force this rate to settle at abysmally low levels. This will then be considered extremely unfair to small savers who lack organised representation. While large and learned depositors will enjoy many choices, small savers from remote rural areas will get exploited because of their ignorance. This means RBI will have to intervene and come out with a minimum floor rate to protect small savers.

As was done in Hong Kong, I think Indian regulators could have implemented the deregulation of SB rates in a calibrated fashion with many checks and balances. As some experts suggested, the regulator could have timed the deregulation when the interest rate trajectory was stable so that the decontrolled rate would not result in abrupt changes. Given Indias present social landscape, the regulator could have come out with a minimum floor and a cap on this historically clean product (with uniform rate to all savers irrespective of their social, economic, locational or educational status) to avoid chaos.

As SB rate deregulation is introduced in India in the present tight liquidity conditions, there is a possibility of an unhealthy rate war among banks, giving way to heightened volatility in their resource profile. This certainly does not augur well for their ability to fund long-term projects. Till the time India lacks reliable alternatives in the form of a liquid and well-developed corporate bond market or easy access for its banking sector to long-term instruments of funds, deregulating the SB rate may not yield the desired results.

One has to wait and watch.

MADAN SABNAVIS

Chief Economist, CARE Ratings

Free pricing helps banks manage their costs more efficiently because they can fine-tune them depending on their requirements

Deregulation of interest rates on savings deposits is probably the last mile in interest rate reforms in India. Though the timing may be debated, banks will surely see something good in this move. For the system as a whole these deposits constitute a little less than a quarter of overall funds they have increased from around 21 per cent in FY00 to 25 per cent in FY06 and moved down to 23 per cent in FY10. There are four reasons for banks to cheer.

First, the freedom to price around a quarter of available funds gives them better control over an important section of their funds. Second, free pricing helps banks manage their costs more efficiently because they can fine-tune them depending on their own requirements and market conditions. The fact that these deposits are almost constant can give most banks flexibility in pricing, although ironically the mirror image would offer scope for competition to dip into them. Third, banks can increase or decrease this reservoir of funds to the extent that is possible based on their own requirements. This will foster competition between banks and enable them to compete with liquid mutual funds, which are the direct alternative. Also by changing terms of transactions like minimum balance, charges for services and so on, they can encourage or discourage such deposits. Finally, as a consequence of these three factors, asset-liability management becomes easier since banks can factor movement in these deposits to match maturity of assets.

Though it is true that these deposits have been an almost constant factor for the banking system, these dynamics may change gradually once customers see differential interest rates. One cannot conjecture whether this proportion of 23

per cent will move up or down when rates change. This was also observed when banks started very short-term deposits of 15 days and above a move to get customers to roll over these deposits at a rate that was higher than the savings account rate. Customers did move funds to banks offering higher rates on these deposits. By offering higher rates on savings accounts, there could be migration to these deposits not just within the bank, but also across banks. This will cut administrative costs. Therefore, at the micro level, banks will have scope to play with their balance sheet more effectively.

Individuals usually hold cash at home for liquidity, savings deposits for security and convenience, and term deposits for income. While funds may be swapped between banks or across deposits, the overall amount of deposits may not change if rates are increased, given the profile of customers who are already exposed to various alternatives. Therefore, at the macro level the impact may be minimal since it should be recognised that liquid debt funds tend to give higher post-tax yields. Similarly, if the rates come down, customers may not actually withdraw substantially from this account.

We have already seen disparate reactions from banks. The large ones have been silent, while some smaller ones have increased these rates. This will really be the challenge for banks at the micro level where the share of savings accounts is lower, as in the case of foreign banks (about 15 per cent) and old private banks (around 19 per cent). Those that are already at 23-24 per cent may not really have scope to do so, based on past trends in terms of garnering deposits. The onus will be on banks to actually manage this portion of funds.

So, is it good for the banking system? Certainly yes, since it gives banks the freedom to manage their funds more adroitly. The consequences of the impact on the amount of deposits may not change but as long as it is market-determined, the system will be efficient. The real challenge is for the Reserve Bank of India

when interest rates come down substantially as they did in 2002-2005 when term deposits gave returns of around five per cent. Logically, the savings rate should have also come down proportionately to close to nil in case a spread of, say, 400-500 basis points is to be maintained as is the case today. This may be tough to accept.