Why banks have not hiked savings deposit rates, yet – MONEY & BANKING – The Hindu BusinessLine

It was in July last year that SBI’s unceremonious 50 bps cut in savings deposit rate had rattled depositors and triggered a spate of similar cuts across other banks. The reason? The steep reduction in lending rates and the benefits of surplus inflows ebbing after demonetisation had started to hurt banks’ margins.

Beginning this year, the tables have turned. Banks have been raising fixed deposit and lending rates aggressively since January. But interestingly, none of them have raised their savings deposit rate yet. The reduction of low-value savings deposit rate to 3.5 per cent (from 4 per cent) stays stock still. Why have banks not been as nimble to hike savings rate as they were to slash them?

Cartelisation?

Interest on savings account was deregulated from October 2011. But nearly all banks stuck with offering 4 per cent rate on savings deposit, even in rising rate cycles. Since 2011, there had been two rate hike cycles (until last year), none of which nudged banks to raise rates on savings deposits.

Large banks, particularly state-owned ones, have sizeable deposit bases. Savings accounts form 25-30 per cent of the total deposits for most of these banks.

Thus, even a 1 per cent increase in rates on savings deposit can shave off 20-30 bps from these banks’ margins. This is why most banks had not tinkered with savings deposit rates for a long period.

When rates were deregulated, only a few banks – YES Bank, Kotak Bank, IndusInd Bank and Lakshmi Vilas Bank – chose to offer higher rates (5-7 per cent) to their depositors.

In a bid to garner more market share, a low deposit base gave them leeway to offer higher savings deposit rates.

For instance, in 2011-12, savings deposit formed just 5 per cent of YES Bank’s total deposits.

Sudden cut

Last year, the dead issue of cartelisation of savings deposit rate made an oddly, undesirable headway when SBI reduced savings deposit rate for deposits of Rs. 1 crore and below from 4 per cent to 3.5 per cent. This came in handy as the bank’s steep cut in MCLR (marginal cost of funds-based lending rate) had been exerting pressure on its margins.

Other banks were quick to follow, lowering rates on low-value savings deposits (threshold ranging from Rs. 25-50 lakh).

Since then, banks have not tinkered with these rates, even as they have hiked fixed deposit rates by 25-35 basis points on average – a few banks have raised interest rates on specific tenure deposits by 60-75 bps.

Driven by weak credit offtake and rising bad loans, banks appear to be reluctant to raise rates on savings deposits. With savings deposits still forming over a fourth of many banks’ total deposits, a 50 bps hike could eat into already thin margins – possibly a 15-20 bps impact.

Depositors, who were stuck with a meagre 4 per cent rate for over half a decade, may be stuck with a lower rate for yet another long period of time.

A few banks such as IndusInd and YES Bank, which were offering higher rates initially, have also been trimming their rates over the years. For instance, from May 2015, IndusInd cut its savings rate by 0.5 percentage points to 4 per cent for deposits up to Rs. 1 lakh and offered 5-6 per cent for higher-value deposits.

From September last year, it has raised the threshold for higher rates – 4 per cent for deposits up to Rs. 10 lakh and 5-6 per cent for deposits above Rs. 10 lakh

Similarly, YES Bank offered 6 per cent on deposits below Rs. 1 lakh until March 2015. It has since trimmed this deposit rate to 5 per cent.

via Why banks have not hiked savings deposit rates, yet – MONEY & BANKING – The Hindu BusinessLine