Does deregulated Savings Deposit rates mean free lunches for depositors?
RBI has deregulated savings bank deposit rates with effect from October 25, 2011. The clear implication as of now is – increased funding costs for the banking fraternity and party time for the depositors with idle funds in their savings accounts.
One can expect the savings account interest rate to stabilize anywhere around 5% per annum for up to Rs.1 lakh deposits and 5.5% for account balances of over Rs.1 lakh by mid November, as more and more banks factor in the liberalised interest rate regime based on their availability of funds and market liquidity.
While banks with relatively low share of savings deposits to total deposits are most likely to woo customers with their higher interest rate offering for idle savings account balances, those with higher proportion of savings deposits in their kitty are likely to take a direct hit on their margins as their funding costs rise with market determined rates sooner rather than later.
In its second quarter review of monetary policy for 2011-12, RBI had notified that a uniform interest rate has to be applied for savings bank deposits up to Rs.1 lakh. It further stated that for savings deposits above Rs.1 lakh, banks can administer differential interest rates but without differentiating on customer to customer basis on similar deposit sizes.
Private sector banks have taken the lead to reward the customers with higher interest on the saving account balances – Yes Bank, IndusInd Bank and Kotak Mahindra Bank have offered a lucrative 6% yield to the customers, higher by 200 basis points than the uniform 4% interest rate under the regulated regime.
Even state-run SBI has hinted towards hike in deposit rates by 100-125 basis points going further. While SBI has around 34% of its total deposits in savings bank account, Yes Bank boasts of lowest savings deposit ratio in the industry at 1-2% of total deposits.
However, just as there are no free lunches in this world – I am sure even banks would find some way to recuperate at least partial losses from such deposit rate hikes by way of imposing stiff penalty or pre conditions with respect to tenure or frequency of withdrawal of idle funds lying in the savings accounts.
Moreover, the new regime will herald thinning of the spreads between savings deposit rates and fixed deposit rates going further. It would be equally interesting to determine as to what shape and innovation does the product offering from banks takes under the new freed interest rate regime.
On the flip side, depositors also need to keep in mind that when the interest rate cycle turns its tide to downward trajectory, the banking industry will be at no pain in rolling back interest rate hikes on savings deposits in line with lower cost of funds then.
Do you feel depositors will really get a better deal from their bankers?