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Savings Bank Deregulation –
RBI Releases Discussion
Paper
Quick Comment: The RBI has released a discussion
paper on savings rate deregulation – This paper
highlights the pros and cons of a move to deregulate the
savings deposit rate in India. Savings deposits are
individual demand deposits where interest rates are
currently regulated by the RBI (at present banks have to
pay a fixed 3.5% rate on these deposits). This is the last
interest rate in India that is still regulated, and the RBI
has been talking about potentially deregulating this and
linking it to market rates.
The tilt of the discussion paper seems to be pro
deregulation – The central bank says that the
arguments supporting such a move are:
- It will be attractive for savers, as returns on savings
deposits rise. Since the 3.5% headline has not been
changed for almost eight years, savers have suffered.
- It will improve transmission of monetary policy, as
currently banks’ funding cost is buffered by fixed rates
on savings deposits. If this is deregulated, savings
deposit rates will move in line with market rates.
- It may lead to product innovation.
The RBI also outlines arguments against such a move.
But at the same time, it has outlined why these
arguments are wrong, indicating its tilt towards
deregulation.
- It will give rise to unhealthy competition, as banks with
a low SA base will compete aggressively. However, the
RBI says that when it deregulated term deposit rates in
the late 1990s, there was no evidence of meaningful
unhealthy competition. It says that as term deposit
deregulation did not cause unhealthy competition, it is
unlikely that savings rate deregulation will.
- It will create ALM mismatches – A large part of savings
deposits at banks are core savings deposits and hence very
long term in nature. Banks fund term loans using these savings
deposits. If rates are deregulated and savings deposits move
from one bank to another, it will cause ALM mismatches in
the system.
The RBI says that since it does not think there will be unhealthy
competition, it is unlikely that there will be large shifts in
deposits. Moreover, given that all other forms of asset and
liability interest rates have been deregulated, continuing
regulation of savings rate would lead to distortions.
The tilt clearly seems to be towards deregulating the
savings rate, although banks may be allowed to charge
fees on certain services provided to these depositors.
Banks have till May 20 to give their feedback to the RBI. At
the very least, we expect the RBI to raise interest rates on
savings deposits from the current 3.5%, given inflation.
More likely, they will come out with a time line on
deregulating the rate.
Impact – The immediate impact will be on banks’ high savings
account deposits, as they could lose deposits to other banks.
Structurally, banks are likely to tinker with their asset yields to
keep revenues stable – Indian banks make only 1-1.1% ROA,
which is not high. But there may be a few months where
competition for savings deposits increases sharply, and this will
hurt earnings and multiples, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Savings Bank Deregulation –
RBI Releases Discussion
Paper
Quick Comment: The RBI has released a discussion
paper on savings rate deregulation – This paper
highlights the pros and cons of a move to deregulate the
savings deposit rate in India. Savings deposits are
individual demand deposits where interest rates are
currently regulated by the RBI (at present banks have to
pay a fixed 3.5% rate on these deposits). This is the last
interest rate in India that is still regulated, and the RBI
has been talking about potentially deregulating this and
linking it to market rates.
The tilt of the discussion paper seems to be pro
deregulation – The central bank says that the
arguments supporting such a move are:
- It will be attractive for savers, as returns on savings
deposits rise. Since the 3.5% headline has not been
changed for almost eight years, savers have suffered.
- It will improve transmission of monetary policy, as
currently banks’ funding cost is buffered by fixed rates
on savings deposits. If this is deregulated, savings
deposit rates will move in line with market rates.
- It may lead to product innovation.
The RBI also outlines arguments against such a move.
But at the same time, it has outlined why these
arguments are wrong, indicating its tilt towards
deregulation.
- It will give rise to unhealthy competition, as banks with
a low SA base will compete aggressively. However, the
RBI says that when it deregulated term deposit rates in
the late 1990s, there was no evidence of meaningful
unhealthy competition. It says that as term deposit
deregulation did not cause unhealthy competition, it is
unlikely that savings rate deregulation will.
- It will create ALM mismatches – A large part of savings
deposits at banks are core savings deposits and hence very
long term in nature. Banks fund term loans using these savings
deposits. If rates are deregulated and savings deposits move
from one bank to another, it will cause ALM mismatches in
the system.
The RBI says that since it does not think there will be unhealthy
competition, it is unlikely that there will be large shifts in
deposits. Moreover, given that all other forms of asset and
liability interest rates have been deregulated, continuing
regulation of savings rate would lead to distortions.
The tilt clearly seems to be towards deregulating the
savings rate, although banks may be allowed to charge
fees on certain services provided to these depositors.
Banks have till May 20 to give their feedback to the RBI. At
the very least, we expect the RBI to raise interest rates on
savings deposits from the current 3.5%, given inflation.
More likely, they will come out with a time line on
deregulating the rate.
Impact – The immediate impact will be on banks’ high savings
account deposits, as they could lose deposits to other banks.
Structurally, banks are likely to tinker with their asset yields to
keep revenues stable – Indian banks make only 1-1.1% ROA,
which is not high. But there may be a few months where
competition for savings deposits increases sharply, and this will
hurt earnings and multiples, in our view.
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