Banks fear high interest rates will dent profits

Banks fear high interest rates will dent profits

Experts opine funding costs will flare up

CRISIL Ratings’ Head Suman Chowhdury said “the rise in the savings deposit rate will increase pressures on banks’ profitability.”  The banks’ return on asset ratio is expected to drop by an additional 5 bps (basis points) because of this development, even if banks increase their transaction and service charges on such deposits, according to him.

The Reserve Bank of India (RBI) early this week allowed banks to decide on their own the interest rate on savings deposits. However, the apex bank asked banks to pay a uniform rate on savings deposits up to Rs 100,000 irrespective of the amount in the account.

Lenders may offer differential rates on deposits above Rs 100,000, but there should not be any discrimination between customers on interest rates for similar deposit amounts. Banks have been paying four per cent interest on savings deposits.

The move was not well received by investors, as bank shares plunged on Tuesday last in an otherwise strong broader market as the 12-share Bank Nifty closed 1.41 per cent down, though the benchmark 50-share S&P CNX Nifty ended 1.83 per cent higher.

“We think this is a positive move for the economy, even though it is a negative for banks, as it will increase their funding costs,” Tushar Poddar & Prakriti Shukla, economists with Goldman Sachs, said in a note. Economists and analysts fear in the short term, the deregulation may lead to a rate war, with small and medium-sized banks looking to strengthen their retail deposit bases will hike their savings deposit rates aggressively.

It took no time for YES Bank, the youngest lender in the country, to increase its savings deposit rate by 200 bps to six per cent. The private lender’s share of low-cost deposit was only 11 per cent at the end of September.

Some lenders like IDBI Bank, Canara Bank, Bank of India, Union Bank of India and the private sector Federal Bank who have relatively lower share of the savings deposit base, may raise rates soon.
“This change (deregulation of the savings deposit rate) is likely to result in an upward pressure on the deposit and interest rate trajectory in the near term, given the ongoing tightness in liquidity,” Siddhartha Sanyal, chief economist of Barclays Capital in India, said.

Industry experts view that some bank stocks which enjoyed a premium over their peers owing to strong retail deposit base may need to be re-rated.

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