Thursday, May 5, 2011

interest rate on savings bank accounts raised by 50 basis points


on Thursday, May 5, 2011

The Reserve Bank of India (RBI) has raised the interest rate on savings bank accounts by 50 basis points (bps), or half a per cent, from 3.5% to 4%, which will boost returns to savers hurt by rising inflation but squeeze profits of banks. With headline inflation now close to double digits, returns for all those who have parked money in savings accounts have been negative for quite a while with pressure building up for the central bank to free up the last of the administered rates in the financial sector.

The 50-bps increase in rates, which comes after eight years of it being constant, will lift the cost of banks in the range of 10 to 15 bps. Collectively, for the banking industry, it will work out to close to Rs 6,000 crore. Savings accounts now constitute about 23% of the total deposits in the banking system. Lenders, however, have shrugged off worries relating to eroding of profitability of banks, saying that they would pass on the burden to customers by way of increasing lending rates.

"There is no major concern on net interest margins compressing as interest rates on loans would also rise in the range of 50 to 100 bps,'' said Aditya Puri, managing director and chief executive officer of the country's second-largest private bank HDFC Bank . The net interest margin, or NIM as it is popularly referred to in the banking industry, is a measure of the difference between the yield on loans and the interest on deposits and is a key indicator of profitability of banks.

The head of research of credit rating agency Crisil, Ajay Srinivasan, said that the rise in rates will pull down NIM for banks by close to 10 bps. Crisil reckons that to compensate for the rise in the cost of deposits banks may impose additional charges for providing various facilities on savings accounts. The agency also said that although NIMs would decline, the impact on net profit will be partly offset by an increase in fee income. Current and saving account, or CASA, deposits are way cheaper than time or term deposits , with the going rate for such deposits of a period of six months or more topping 8%. The last time the savings bank interest rate was raised was in April 1992.

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