Expect lower loan rates at large banks, but interest on deposits may come down

Large banks may soon follow State Bank of India (SBI) and reduce their interest rates on deposits and loans after the Reserve Bank of India’s 25 basis point (bp) cut in key policy rate on Wednesday.

With this, customers may benefit from lower loan rates but also get lower interest on their deposits parked with the bank.

Anticipating a policy rate cut, the country’s largest lender, SBI, on Monday cut the interest rate on savings accounts by 50 bps to 3.5 percent from 4 percent to protect its margins in the dwindling interest rate scenario.

One bps is one-hundredth of a percentage point.

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In the landmark move, SBI has introduced differential pricing for savings deposits, revising it downwards for the first time after rate de-regulation was announced in October 2011.

Other big lenders including Bank of Baroda, Bank of India and Union Bank of India have indicated that they may look at a possible replication of a similar or lesser reduction at their asset-liability committee (ALCO) meetings by next week.

"With the RBI rate cut, there will be some savings in cost of funds and the MCLR (marginal cost based lending rate) computation will get re-priced by default. Also, since SBI cut deposit rates, large banks would follow suit with some reduction. This will help in some reduction in lending rates," said a senior Bank of India official.

Loan Rates

Lending rate cuts typically follow a deposit rate reduction. Previously, large lenders have usually matched the rate set by SBI in both deposit and lending rates.

Parthasarathi Mukherjee, Managing Director and Chief Executive Officer at Lakshmi Vilas Bank, said: "Funding is generally comfortable for banks now. And cost of funds for private banks comes down faster because of shorter maturities and re-pricing happens quicker so there is some scope (for reduction). So, as bigger banks reduce, the smaller banks will also gradually reduce rates."

As per an Edelweiss report, "With SBI making the move, we expect others to follow suit…We expect this move to cushion NIMs (net interest margins) at sector level (versus anticipation of decline) and earnings to bolster up to 2-6 percent for private banks and 15-20 percent for PSU banks (everything else remaining same)."

Further, Governor Urjit Patel said, "Given the liquidity conditions prevailing and that we have reduced policy rates by substantial amounts since the easing cycle started, there is scope for banks to reduce lending for those segments that so far have not yet benefited to the full extent of our policy rate cuts."

Since January 2015 when the easing cycle began, the RBI has cut repo rate by 2 percentage points while banks’ lending rates on fresh rupee loans have declined by about 1.38 percentage points, especially on the base rate.

Average reduction in MCLR since its inception in April 2016 has been about 92 bps. During the same period, average base rate on fresh loans has been cut by 75 bps, while on outstanding loans, it is even lower at 57 bps.

RBI has observed that while the extent of change in Base Rate has not necessarily mirrored the revision in MCLR, the rigidity of Base Rate is a matter of concern for an efficient transmission of monetary policy to the real economy.

"Given a large part of the floating rate loan portfolio of banks is still anchored on the Base Rate, the RBI will be exploring various options in the near future to make the Base Rate more responsive to changes in cost of funds of banks," RBI said.

Deposit Rates

However, smaller competitive banks may stand to gain market share marginally as they would continue their offerings which are higher by 1-2 percentage points (100-200 bps) on deposit rates.

On Thursday, Kotak Mahindra Bank announced that it will continue to offer 5 percent and 6 percent interest rate on savings account balances up to Rs 1 lakh and above Rs 1 lakh and up to Rs 1 crore, respectively.

Shanti Ekambaram, President - Consumer Banking, Kotak Mahindra Bank, said, "Our focus continues to be on building a quality retail franchise. Hence, we are holding our savings interest rate in the retail segment."

Similarly, Yes Bank and IndusInd Bank which offer similar rates in the 5-6 percent range also have gained market share with an additional 20 percent coming from their current account savings account (CASA) deposits with such differential pricing.

CASA deposits are low-cost funds for banks and considered to be a stable base of deposits.

However, because customers tend to use savings accounts for convenience rather than investment gains, it is a long haul for banks to garner a significant pool of savings.

Mukherjee said, "There is no fun in gaining tiny market share as pricing is not the only factor for customers to come to banks. So, most of them will see some reduction in their deposit and lending rates."

According to data from Credit Suisse, while private banks have captured more than 90 percent of incremental loans in the past one year, less than 40 percent of the incremental deposits have been taken by them.

In a report released on Tuesday, it said there is a risk that the deposit rate cut could accelerate market share losses for public sector banks on the liabilities side.