Consumers set to earn more on savings accounts as RBI de-regulates interest rates

NEW DELHI: Consumers are set to earn more on their savings accounts with the Reserve Bank of India (RBI) on Tuesday de-regulating interest rates, the last administered bank rate in the economy. The move will push up cost of funds, sending bank shares sharply lower.

"It is felt that the time is appropriate to move forward and complete the process of deregulation of rupee interest rates," said Governor Duvvuri Subbarao during the second quarter review of the apex bank's monetary policy for this fiscal.

Currently, the savings rate stands at 4 percent, which was last raised in May after remaining unchanged for 8 years.

For deposits up to Rs 1 lakh and irrespective of the amount in the account within this limit, a bank will have to offer a uniform interest rate.

For savings bank deposits over Rs 1 lakh, a bank may provide differential rates of interest, if it chooses to do so.

"However, there should not be any discrimination from customer to customer on interest rates for similar amounts of deposits," said the RBI Governor.

The market gave a thumbs down to the proposal with shares of major lenders State Bank of India, HDFC Bank, Axis Bank, Bank of Baroda, Allahabad Bank falling as much as 2-6 percent. The key banking sector index was down 2.66 percent in recent trade.

"It will definitely increase cost of funds for banks towards maintaining current account savings account deposit growth," Moses Harding, head of global markets group, IndusInd Bank said. IDBI Bank executive director R.K.Bansal said that he expects the savings rate to rise to 6 percent.

Bansal estimates that banks with lower share of savings rate deposits will take a 10-20 basis points hit on margins, while banks with larger share of savings account deposits will see a 40-50 basis points fall.

Already banks' cost of funds have gone up after the RBI mandated that banks calculate interest paid on savings deposits on a daily basis while the savings bank rate was last raised by 50 basis points.

Savings deposits are a source of low-cost funds for banks, which form 22 percent of banks' total deposit base and 13 percent of savings of the household sector.

This makes it a politically sensitive interest rate as savings deposits are held largely by households, particularly in rural areas where financial literacy is not widespread.

New age private banks are likely to aggressively move now to mop up low cost deposits, which traditionally has been the prerogative of the larger banks.

"We will have to digest it now," said N.S. Srinath, executive director, Bank of Baroda. "We will have to analyse the impact, because the gap between savings rate and term deposit rate is quite huge."

Term deposit rates are as high as 11 percent for several banks for some tenors making the spread over the savings rate large.

RBI had prepared a discussion paper last November on deregulation of savings bank deposit rate which spelt out both the pros and cons of deregulating the interest rates on savings deposit.

While RBI said that the deregulation will aid in monetary transmission, Indian lenders were not in favour of the proposal citing market volatility.

They had said they would be forced to raise transaction charges for ATM, money transfers and cheque books to protect margins. The central bank will separately issue working guidelines on deregulation.