Early indications from smaller private sector banks that have moved in response to the freeing up of the interest rate on savings bank deposit suggest that customers do get attracted when higher returns are offered.
Public sector banks and large private sector banks, however, are as yet unmoved despite the Reserve Bank of India deregulating the SB deposit rate last month.
Private sector banks such as YES Bank, Kotak Mahindra Bank, IndusInd Bank and Ratnakar Bank are offering above average industry interest rates, ranging from 5.5 to 6.0 per cent, on SB deposits.
However, public sector banks and large private sector banks continue to offer four per cent interest rate on these deposits.
“Customers are sensitive to interest rates. For a customer, besides product feature and availability, interest rate plays a key role in his decision-making matrix.
New accounts
“Though it is still early days, what we are seeing is that customers are showing a tendency to consolidate their money in the above Rs 1 lakh slab where we are offering six per cent interest,” said Mr K.V.S. Manian, President (Consumer Banking), Kotak Bank.
Further, ever since the SB interest rate hike was announced – 5.5 per cent on deposits up to Rs 1 lakh and 6.0 per cent on deposits above Rs 1 lakh – by the private sector bank late last month, new account opening has gathered pace.
“Our rate of growth of new SB accounts now is 1.5 times higher as compared to what it was before the deregulation,” emphasised Mr Manian.
casa
Currently, current account and savings (bank) accounts (CASA) constitute about 26 per cent of Kotak Bank's total deposits of Rs 36,500 crore. Of the total deposits, CA and SA constitute 16 per cent and 10 per cent of total deposits respectively.
Riding on the back of higher SB rate, the bank expects to increase the proportion of SA to 15 per cent of total deposits in a year's time, said the Kotak Bank official.
According to Mr. Nitin Chopra, Head (Retail and Consumer Banking), Ratnakar Bank, existing customers are likely to consolidate their balances with his bank as it is offering 5.5 per cent interest rate on SB deposits.
“New customer inquiries are coming in from both individual customers and corporates for their salary/payroll accounts. It will, however, take longer time to assess the full impact (of higher SB interest rate) as this plays out in the market place.
“Early action is being noticed from rate sensitive segments like the retired and semi-urban and rural markets,” he said.
Public sector banks and large private sector banks, which on an average have CASA at 40 per cent of total deposits, are playing a wait-and-watch game when it comes to increasing the interest rate on SB deposits.
Moreover, with credit offtake being tepid in the financial year so far and Government bond prices coming down, these banks don't want to attract more resources when they cannot be deployed profitably.
Cost implications
Increasing the SB deposit rate will have huge cost implications for the big banks. For example, if State Bank of India increases its SB interest rate by 100 basis points to five per cent, then the additional interest expense it would incur would be Rs 1,000 crore on a SB deposit base of Rs 1 lakh crore.
Officials from big banks see the interest rate hike by smaller private sector banks as only an attempt to shore up their low SB accounts base.
They are confident that their customers won't go shopping for interest rates as SB accounts are meant more to put through day-to-day banking transactions than earning interest.
If customers want higher interest, they could always use the sweep facility to transfer surplus funds into the high-yielding fixed deposits.
Market driven
The Bank of Baroda Chairman and Managing Director, Mr M.D. Mallya, in an interview to this paper late last month, cautioned that the interest rate on SB deposits could move both ways because it is market-driven.
“When the liquidity is tight or when we see the interest rate scenario pointing northwards, as we are seeing at this point in time, may be, the customer would be able to get a better return on his savings from the banking system. However, the reverse would happen when the liquidity is surplus and the overall interest rate scenario is different from what it is today,” said Mr Mallya, who is also the Chairman of the Indian Banks' Association.
The RBI freed the interest rate on SB deposits on October 25.
In its second quarter review of the monetary policy for 2011-12, the central bank said that, henceforth, each bank will have to offer a uniform interest rate on SB deposits up to Rs 1 lakh.
In the case of SB deposits over Rs 1 lakh, banks can provide differential rates of interest.