Higher savings account interest rate to hit bank nims
Get details information about savings account interest rate to hit bank NIMs. Following article informs you and guides you about saving account interest.
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.
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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.
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Insurance Actuarial Services - CRISIL Research is the country's largest independent and integrated research house with strong domain expertise on Indian economy, industries and capital markets.