News Analysis

SBI’s savings rate cut could nudge others also to trim rates

Radhika Merwin BL Research Bureau | Updated on January 11, 2018 Published on July 31, 2017

Weak core performance and sharp cuts in lending rates could see more banks cut savings rates to safeguard margins

SBI, which has a savings deposit base of over ₹7 lakh crore (as of FY17) that form about 36 per cent of its total deposits, is likely to gain about 15 basis points on the margins front.

The half-percentage-point reduction in savings deposit rate for deposits of ₹1 crore and below, which form 90 per cent of its savings deposits, can come in handy at a time when the bank’s steep cut in MCLR (marginal cost of funds-based lending rate) has been exerting pressure on its margins.

But for depositors who have been dealing with sharp cuts in banks’ fixed deposit rates over the past year, SBI’s latest move only makes matters worse.

In recent months, top officials at public sector banks have been indicating a possible tweak in the savings bank deposit rate. SBI, the largest lender, trimming the savings deposit rate can soon trigger a spate of cuts across banks.

Depositors’ plight

From April until November 2016 (before the demonetisation move), fixed deposit rates had fallen by 30-50 bps in leading banks across various tenures.

But with bank deposits swelling post the Centre’s move to scrap old high-denomination notes, deposit rates fell by a substantial 50-100 bps across banks between November and February this year.

Even in recent months, the fall in fixed deposit rates has been steep, led by public sector banks, which have cut rates by as much as 50-75 bps in certain buckets.

SBI’s move to trim the savings deposit rate, which has been unchanged since 2011, has only added to depositors’ woes.

Deregulated

Interest on savings account was deregulated from October 2011. But 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. Other banks have been offering a uniform 4 per cent, even in rising rate cycles.

Large banks, particularly State-owned ones, have a sizeable deposit base. Savings accounts form 25-30 per cent of 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 many banks were wary of increasing the savings deposit rates.

The select few that offered higher saving rates of 5-7 per cent, were able to do so on a lower deposit base. For instance, in 2011-12, savings deposit formed just 5 per cent of YES Bank’s total deposits.

Spate of cuts

But these banks too have been cutting rates over the past one to two years to safeguard margins. 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 5-6 per cent for deposits above ₹5 lakh.

Similarly, YES Bank offered 7 per cent on deposits above ₹1 lakh until March 2015. It has since trimmed it to 6 per cent on all deposits below ₹1 crore.

These banks have been trimming their rates to safeguard margins, as lowering rates by a few basis points has led to cost savings.

SBI has cited two reasons for trimming the savings rate.

One, with the inflation falling to very low levels, the real interest rate has been very high.

Two, the benefits post-demonetisation in the form of surplus inflows have been waning. Of the deposits that flowed in, only 40 per cent remains with the bank.

SBI had slashed its MCLR by 90 bps in January, passing on the benefit of lower cost of funds post-demonetisation.

With this advantage now diminishing, the bank has been forced to lower the savings deposit rate rather than hike the MCLR.

Given that other banks too are in the same boat, having cut the MCLR by 70-80 bps, SBI’s cue is enough to lead them to wield the scissors on their savings deposit rates as well.

If the RBI cuts the repo rate in the upcoming policy this week, then depositors may have to brace themselves for more pain in the coming months.

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