IndusInd Bank joined Kotak Mahindra Bankand Yes Bank in a war for deposits with 50% rise in rates for savings bank accounts. This threatens to create turbulence in the system and push up lending rates which will bite borrowers even if the central bank refrains from raising rates further.
These rates are targetted at attracting new customers for these banks, but established ones such as State Bank of India, HDFC Bank and ICICI Bank may have to follow suit to retain customers. Once the cost of funds for big banks go up, they may raise lending rates to maintain profitability.
"We are watching market developments and if cost of funds for the bank goes up, lending rates will increase,'' said Chanda Kochhar, MD and CEO, ICICI Bank. "The bank will maintain its margin.'' She declined to say whether ICICI Bank planned to raise rates for savings bank account holders.
IndusInd Bank on Monday said it would offer 5.5% on savings deposits of up to Rs 1 lakh and 6% on deposits over Rs 1 lakh. The bank has also revised its base rate upwards by 25 basis points to 10.75%. Kotak Mahindra Bank and YES Bank raised interest rates on savings accounts with balance of over Rs 1 lakh to 6% after RBI freed it last week.
Move to Hurt Banks' Profitability
"It is an opportunity for us,'' said Romesh Sobti, managing director and CEO, IndusInd Bank, which has 27.70% as low-cost deposits compared with Axis Bank's 42%. "Over a period of five to six months when the turbulence settles, banks would increase transaction charges on saving products to recover the cost partially. '' "The rise in savings deposits rate will increase pressures on banks' profitability,'' said Suman Chowdhury, head, Crisil Ratings. "The banks' return on assets ratio is expected to drop by an additional 5 basis points because of this. However, the banks are likely to partially offset the impact of the increase in interest cost by levying transaction and servicing charges.''
Many banks in the past have indicated at raising service charges. "There could be an upward bias on service charges if saving rates go up,'' Aditya Puri managing director and CEO of HDFC Bank had said. But the fight to raise the share of saving deposits may be a surprise to the central bank which believed that there may not be a competition now. "This is a time when there will be less intense competition for deposits than there would have been three to six months ago,'' Governor D. Subbarao said in an interview.
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