Monday, June 21, 2010

Deregulation of interest rates on SB account

Those who clamour for deregulation of interest rates on savings accounts found a new supporter in the Deputy Governor of RBI , who said that RBI was keen on deregulating all rates - including SB rates. ( The Business Line , without naming him reports that he was vehemently against deregulating SB rates, when he was CMD of a bank which had a large SB base !!! ..well they say the only thing that is constant is change !!)

Banks have always competed for current accounts which are non interest bearing and savings accounts which are low interest( 3.5% pa) bearing - as these are the cheapest source of funds for banks. Some nationalized banks because of their large presence and some private sector banks , because of their deliberate strategy have a larger share of these accounts than others. The have nots - if I can call them thus, had to compete with the haves on all parameters - except interest rates. With this ( likely ) move, they would also be able to compete on interest rates.

Most banks already segment their customers based on the balances they maintain in their savings account. In my view, the higher end segments might get another 50 to 100 bps more for their account balances. The lower end segments may lose out - that is if one considers 3.5% interest rate to be a number of any value - particularly considering the current inflation rates !. I also expect banks to step up charges for deposit related services and penal charges for non maintenance of stipulated balances. At the end of the day, I dont see the net adverse impact on the bank's financials to be more than say 25 bps.

The usefulness of this move in asset liability management is, in my view, stretching things a bit too long. Currently 10 % of the SB balances are considered volatile and withdraw-able and are bucketed in the 'next day', 2-7 days and 8 to 14 day bucket. The rest of it is bucketed as core deposits in the long term bucket. I dont see how a 50 to 100 bps change will impact this bucketing significantly.

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