Savings Rate Cut

As more banks follow, be prepared for lower rates on deposits…

Shortly after SBI took the lead in cutting the rates of interest on savings deposits, many more banks have followed suit. Banks like PNB, BOB, HDFC Bank, Axis Bank, Yes Bank and Kotak Bank have all cut their rates of interest on savings by 50 basis points. Here are 3 things that we need to understand here…

Banks had no other choice… 

Essentially that is what it boils down to. The banks were struggling with falling loan growth and rising deposits. The problem became a lot more acute after the demonetization drive of the government. In the two months of demonetization, nearly Rs.7 trillion came into the banking system in the form of deposits. That really put banks in a quandary. On the one hand, the loan growth was not picking up and on the other hand the deposit base was rising that had to be serviced. The banks had to choose between one of the two options. Either they could raise the rates on loans given or cut the rates on deposits. With loan demand already tepid and corporates having access to debt markets, a rise in loan rates was virtually ruled out. The only option was to cut the rates on deposits. Cutting savings rates was the low hanging fruit. With the growing CASA pie, banks had a problem with the 4% payable on savings accounts. The 50 bps cut will help reduce the cost of managing those accounts, where margins were under stress. This could just be a start!

Savers need to be pragmatic… 

To be fair, savers need to be pragmatic. Just as loan rates are falling in tandem with the cut in repo rates, the rates on deposits will also have to fall. Otherwise, there is no way the banks can continue to be profitable and generate surpluses each year. There have been cuts in FD rates but that has still been much lower than the cuts in the lending rates. That has obviously put pressure on the NIMs of banks. The bigger reality is about real interest rates. A savings bank account that pays 4% interest actually pays 2% real interest after considering the average inflation of around 2%. That is absurdly high and nowhere in the world do savings account pay so much higher than the rate of inflation. With inflation headed lower, savers need to be more pragmatic and get prepared for lower rates on their deposits.

A shift towards risk assets…

Over the last few months, we have seen a shift towards risk assets. That is what savers will now have to do if they want to earn above market returns. Earning 5% real returns on bank FDs and 2% real returns on savings account is hardly a sustainable scenario. The moral of the story is that if savers need higher returns then they need to take higher risk. Rates that are not linked to market reality tend to distort the market. They will have to go and the process has just begun with savings accounts! ©

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