Higher savings account interest rate to hit bank nims

The Reserve Bank of India’s move today to increase the interest rate offered on savings account deposits is expected to pull down the net interest margins (NIMs) of banks. Further, if the RBI goes ahead and deregulates savings account deposit rates, it would enhance competition amongst banks to garner relatively low-cost savings deposits. Banks would attempt to partly offset the resultant increase in costs by levying higher transaction charges. The larger banks are well positioned to handle any such move towards deregulation due to their strong customer relationships, superior reach, ability to cross bundle products, and technological superiority.Savings accounts constitute around 23 per cent of the total deposits of the banking system. The increase in the interest rate offered on savings accounts from 3.5 per cent to 4.0 per cent will pull down the NIMs for banks by around 10 basis points. The impact would be higher for banks with a higher proportion of savings accounts in their deposit mix, explained Ajay Srinivasan, Head – CRISIL Research. For large banks such as State Bank of India, Punjab National Bank, HDFC Bank, and ICICI Bank, savings accounts constitute 30-35 per cent of their total deposits. For relatively smaller banks such as Corporation Bank and Oriental Bank of Commerce, it is lower at 15-20 per cent.The pressure on net interest margins is likely to further increase if the RBI deregulates savings account deposit rates. Deposit rates, in such a scenario, are more likely to mirror short-term deposit rates, which are, for some public sector banks, currently 100-150 basis points higher than the savings account interest rate. To compensate for the rise in cost of deposits, banks may impose additional charges for providing various facilities on the savings account. Some of the aspects that could be tweaked include charges for non-maintenance of minimum balance requirement, the minimum balance requirement itself, additional cheque issue charges, and a limit on the number of free transactions possible through a savings account. Consequently, although the NIMs would decline, the impact on net profit will be partly offset by the increase in fee income.We believe that the relatively smaller banks, which have a lower proportion of savings deposits in their deposit mix, would be more aggressive in offering attractive rates on savings accounts in order to entice customers. The proportion of savings deposits in total deposits of smaller banks – defined as banks other than the top six public sector banks and top four private sector banks – has declined from 24.0 per cent as of March 2006 to 19.5 per cent by March 2010. Thus, not only is the proportion of savings account in total deposits lower for smaller banks compared with larger banks, it has also been declining over the years. Therefore, the incentive to go in for price competition to garner relatively low-cost savings deposits would be high, says Mr. Srinivasan.Irevna is a pioneer in insurance actuarial offshoring. Irevna's actuarial team is a mix of actuaries, student actuaries, CAs, MBAs, and statisticians. Irevna's clients include general and life insurance, reinsurance, and pension and investment management firms and provide them with effective problem-solving tools such as sophisticated actuarial models.Nevertheless, CRISIL Research believes larger banks are relatively well positioned to deal with any such move towards deregulation of savings account deposit rates. By their very nature, savings accounts are generally sticky. Depositors with large banks would be reluctant to shift accounts for a few basis points higher interest due to their existing relationship with the bank, linkage of other accounts such as broking account to the bank account, and technology-enabled transaction facilities such as bill payment and Internet banking.