After the RBI’s festival bonanza early this week, of a 50-basis-point cut in the policy rate, borrowers certainly have a lot to cheer about.
With a slew of banks cutting lending rates, borrowers have to part with less cash for their monthly EMIs (equated monthly instalments).
But sadly, this has also meant earning lesser interest on the amount they safe-keep with banks. This is because banks lower deposit rates before tweaking loan rates. After the recent cuts, loan rates have fallen by 50-60 basis points, but deposit rates have moved lower by a sharper 1-1.25 percentage points over the last year.
But it is not interest rates on fixed deposits alone that have taken a knock. In the last one year, some banks have also been trimming the rates they offer on their savings deposits. IndusInd Bank and YES Bank, which were offering higher rates than their peers, have slowly been cutting back.
Fairer ones After the deregulation of interest on savings account from October 2011, banks were free to set their rates. But barring a few — YES Bank, Kotak Bank, IndusInd Bank and Lakshmi Vilas Bank — the rest continued to offer 4 per cent on their savings deposits, as in the past. The select few offered higher saving rates of 5-7 per cent. By offering differentiated rates, these banks were able to scale up their low-cost deposit base.
But after playing catch-up, some players have started to reduce savings rates for specific deposits.
For instance, IndusInd cut its savings rate by 0.5 percentage points to 4 per cent for deposits up to ₹1 lakh from May 2015. It continues to offer higher rates of 5-6 per cent for deposits beyond ₹1 lakh. Similarly, YES Bank offers 7 per cent rate on deposits above ₹3 lakh, rather than ₹1 lakh earlier.
Safeguarding margins After building a strong deposit base, these banks have started trimming their rates in the last one year to safeguard margins. Given their sizeable savings deposit base, lowering rates even by a few basis points, can result in cost savings.
Savings deposits now account for 14.5 per cent of YES Bank’s total deposits, up from a meagre 1.5 per cent, four years back. For IndusInd Bank, the share of savings deposits in total deposits has gone up from 9 per cent to 18 per cent in the last four years.
For now, these banks have only tweaked interest rates for certain deposit tenures. As they build a larger savings deposit base it is likely that these banks and the others that still offer higher rates, will start trimming their rates further.
Remember, larger banks that have stuck to their modest offering of 4 per cent on savings deposits, are saddled with a larger deposit base — savings accounts forming 25-30 per cent of their total deposits.