Global ratings agency Moody’s today said that the RBI’s recent move to deregulate savings interest rates will reduce banks’ profitability.
“Banks are now free to set their own interest rates ... a direct consequence of this policy is that banks can, and will, offer higher interest rates to compete for savings deposits, thereby, undermining the role these deposits play as a relatively stable and low-cost funding source.
“We expect the move to exacerbate already increasing pressure on net interest margins and asset quality,” Moody’s said in its ‘Weekly Credit Outlook’
In a major policy decision announced during its second quarterly monetary policy review last week, the RBI deregulated saving bank deposits rates. The step is expected to fetch better returns for depositors as competition will intensify.
Moody’s said the step to deregulate savings bank deposit rates, along with the hike of 25 basis points in its key policy rates announced during the review will “hurt banks’ profitability and thus, are credit negative.”
“Savings deposits now account for almost a quarter of the system deposits. For decades, RBI has been setting interest rates on savings accounts and, starting last May and right up until this move, the rate was 4 per cent,” it said.
On the other hand, time deposits generally carry much higher nominal interest rates of 8.5-9.5 per cent.
“Amid the current inflation of nearly 10 per cent, this implies that savers have substantial negative real return on their savings deposits... We expect public sector banks to be the ones most negatively affected by this development,” Moody’s said.
It further said that with the deregulation, public sector banks will need to pay significantly higher interest to maintain their deposit base, notwithstanding their distribution advantage in the rural areas.
Following the RBI’s announcement, Yes Bank and Kotak Bank had raised interest rates on savings deposits in their banks up to 6 per cent.
Today, another private sector lender IndusInd Bank also hiked interest rates on savings accounts by up to 200 basis points, offering clients a return of 6 per cent on their deposits.