New Delhi: The Reserve Bank of India (RBI) on Tuesday deregulated savings deposit interest rate, the last administered bank rate in the economy, in a move which 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," Reserve Bank of India said in its second-quarter monetary policy review. The deregulation is with immediate effect, the RBI said.
Currently, the savings rate stands at 4 percent, which was last raised in May after remaining unchanged for 8 years.
The RBI has stipulated that each bank will have to offer an uniform rate of interest on savings bank deposits up to 100,000 Indian rupees (USD 2,007). Above that, it may provide differential rates of interest.
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 RK Bansal said that he expects the savings rate to rise to 6 per cent.
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 per cent 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 NS 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.
Comments
0 comment