Why have banks not hiked the savings deposit rate yet?

Given the sizeable deposit base, even a 50 bps increase can shave off 15-20 bps from banks’ margins

It was in July last year that SBI’s unceremonious 50 bps cut in the savings deposit rate had rattled depositors and triggered a spate of similar cuts across other banks. The reason? The steep reduction in lending rates then and 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 the 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 the savings account was deregulated in October 2011. But nearly all banks have stuck with offering a 4 per cent rate on the savings deposit, even in rising rate cycles. Since 2011, there have been two rate hike cycles (until last year), neither of which has 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 deposits can shave off 20-30 bps from these banks’ margins. That is why most banks have 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 the 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 the savings deposit rate, made an oddly, undesirable headway when SBI reduced the savings deposit rate for deposits of ₹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 ₹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 have been stuck with a meagre 4 per cent rate for over half-a-decade, may be stuck with a lower rate for a further 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, in May 2015, IndusInd cut its savings rate by 0.5 percentage points to 4 per cent for deposits up to ₹1 lakh and offered 5-6 per cent for higher-value deposits. In September last year, it raised the threshold for higher rates – 4 per cent for deposits up to ₹10 lakh and 5-6 per cent for deposits above ₹10 lakh.

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

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