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De-regulation of saving deposit rate
In its discussion paper RBI appears to be in favour of de-regulating the
savings rate stating that it will enhance attractiveness of savings deposit
and will result in effective transmission of monetary policy. De-regulation
of savings rate could increase cost of savings deposits by 150bps as they
get benchmarked to short term fixed deposits. Effective cost of savings
deposits may not increase as much, as banks are likely to levy transaction
charges. Higher rates are unlikely to result in frequent switches as saving
accounts are sticky, but may influence incremental market share. Banks
with weak technology platforms will be worst impacted; YES Bank and
other small private banks may benefit.
RBI believes deregulation will enhance attractiveness of savings a/c
q Although its not the first time that RBI is talking about de-regulating savings rate
(2003, 2007), the discussion paper put up by RBI suggests it’s a serious issue now
q RBI’s conclusion in the discussion paper hints that RBI is in favour of the deregulation
as it mentions deregulation of rates a) will enhance attractiveness of
savings deposits, b) will encourage product innovation, and c) would result in more
effective transmission of the monetary policy
q RBI also highlights that India is amongst few economies where savings rate are still
administered and that deregulation experience in other market has been favourable
Savings rate may go up by 150bps; banks may levy service charges
q RBI discussion paper highlights that in the past, interest rate on term deposit of 7-
14 days maturity have been close to savings rate deposit rate, arguably hinting
that these could be used at benchmark for pricing interest rate on savings account
q Our industry interaction however suggests that savings rate will be a function of a)
prevailing repo and reverse repo rate and b) 30-45 day term deposits
q Once de-regulated, interest rate on savings account may rise to 4.5-5.0%, 100-
150bps higher than the present ‘fixed’ rate of 3.5%.
q Savings deposit account for 24% of total deposits and an 150bps increase in cost of
these deposits will increase the blended cost of deposit for the sector by ~40bps.
q Earnings impact due to 150bps impact in savings rate may be up to 18%; however
most banks are likely to pass on most of the increase by a) raising lending rates, b)
levying transaction charges and c) raising minimum balance requirement.
Switches unlikely, incremental market share may get impacted
q Saving accounts tend to be sticky in nature as individuals have loan repayments,
utility payments and even systematic investments plans linked to their savings
accounts, changing which can be cumbersome.
q Hence we believe a 100-150bps differential in savings rate offering between two
banks may not really lead to frequent switches by customers.
q However rate differential may impact incremental market share, especially in
shorter periods: Small private sector banks like YES Bank, Indus Ind and ING Vysya
may use this to build their market share in savings account category.
q Banks with high savings account proportion are SBI (36%), PNB (31%) and HDFC
Bank (30%); however most of these in our view would be able to pass on the hike
by levying transaction charges, raising lending rates.
q Banks with weak technology platforms may be the worst hit as they wont be able to
fully pass on the increase in funding costs
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
De-regulation of saving deposit rate
In its discussion paper RBI appears to be in favour of de-regulating the
savings rate stating that it will enhance attractiveness of savings deposit
and will result in effective transmission of monetary policy. De-regulation
of savings rate could increase cost of savings deposits by 150bps as they
get benchmarked to short term fixed deposits. Effective cost of savings
deposits may not increase as much, as banks are likely to levy transaction
charges. Higher rates are unlikely to result in frequent switches as saving
accounts are sticky, but may influence incremental market share. Banks
with weak technology platforms will be worst impacted; YES Bank and
other small private banks may benefit.
RBI believes deregulation will enhance attractiveness of savings a/c
q Although its not the first time that RBI is talking about de-regulating savings rate
(2003, 2007), the discussion paper put up by RBI suggests it’s a serious issue now
q RBI’s conclusion in the discussion paper hints that RBI is in favour of the deregulation
as it mentions deregulation of rates a) will enhance attractiveness of
savings deposits, b) will encourage product innovation, and c) would result in more
effective transmission of the monetary policy
q RBI also highlights that India is amongst few economies where savings rate are still
administered and that deregulation experience in other market has been favourable
Savings rate may go up by 150bps; banks may levy service charges
q RBI discussion paper highlights that in the past, interest rate on term deposit of 7-
14 days maturity have been close to savings rate deposit rate, arguably hinting
that these could be used at benchmark for pricing interest rate on savings account
q Our industry interaction however suggests that savings rate will be a function of a)
prevailing repo and reverse repo rate and b) 30-45 day term deposits
q Once de-regulated, interest rate on savings account may rise to 4.5-5.0%, 100-
150bps higher than the present ‘fixed’ rate of 3.5%.
q Savings deposit account for 24% of total deposits and an 150bps increase in cost of
these deposits will increase the blended cost of deposit for the sector by ~40bps.
q Earnings impact due to 150bps impact in savings rate may be up to 18%; however
most banks are likely to pass on most of the increase by a) raising lending rates, b)
levying transaction charges and c) raising minimum balance requirement.
Switches unlikely, incremental market share may get impacted
q Saving accounts tend to be sticky in nature as individuals have loan repayments,
utility payments and even systematic investments plans linked to their savings
accounts, changing which can be cumbersome.
q Hence we believe a 100-150bps differential in savings rate offering between two
banks may not really lead to frequent switches by customers.
q However rate differential may impact incremental market share, especially in
shorter periods: Small private sector banks like YES Bank, Indus Ind and ING Vysya
may use this to build their market share in savings account category.
q Banks with high savings account proportion are SBI (36%), PNB (31%) and HDFC
Bank (30%); however most of these in our view would be able to pass on the hike
by levying transaction charges, raising lending rates.
q Banks with weak technology platforms may be the worst hit as they wont be able to
fully pass on the increase in funding costs
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