Savings rates revamp to change banking game

The Diwali gift that the Reserve Bank of India (RBI) dished out to bank customers on Tuesday - deregulating savings bank interest rates (SBIR) - is set to cost heavily for banks, knocking about 13 per cent off their profits. And it is expected to be a game changer in terms of attractiveness or otherwise of banking stocks in the coming months.

Earlier banks were mandated to pay four per cent interest on their daily balances of savings bank (SB) accounts. Tuesday's deregulation means that the banks could fix these rates, higher or lower than others.

Speaking to the press after the policy, bank chiefs said that the overall impact of the deregulation could be about one per cent rise in SB rates, though it may touch two per cent in the higher extreme. True to their prediction, new generation private sector Yes Bank hiked its SBIR by two per cent to six per cent on Tuesday itself.

Usually, bank customers keep their surplus or emergency funds that can be withdrawn and used anytime, in their SB accounts. By March 31, 2011, the total savings bank balance of the banking system was at Rs 14,46,900 crore.

"If the interest rates on savings account move up by one per cent, then the additional interest that all the banks put together need to pay is about Rs 14,469 crore," said Jagannadham Thunuguntla, strategist and head of research of SMC Global Securities.

In the current high interest rate regime, the gap between fixed deposit (FD) rates and SB rates is the widest now, which is expected to narrow soon. SB rates across the banking industry are unlikely to shoot up immediately due to slack credit demand. However, when credit demand picks up, SB rates are expected to go up as banks scramble for more resources.

One good thing is that banks may repeat the phenomenal growth seen in the number of SB accounts over the last 10 years to current accounts of companies, including that of small and medium enterprises.

Vaibhav Agrawal, vice- president- research of Angel Broking calculated that a one per cent increase in savings rate would have a 20 basis points impact on the total cost of funds.

Courtesy: Mail Today