RBIs Diwali gift: Now you will get more on your savings bank deposits

However,SBI,Indias largest bank,preferred to play it safe. We are not in a hurry to act on the deregulation of savings bank deposit rates. We have to see how it plays out in the long run. Even otherwise,large-value savings depositors are moving into the sweep accounts for the fixed deposits. So we do not think there are enough customers out there who are using only savings banks. Unless there are other competing measures,as of now savings banks rate with SBI will continue where it is at 4 per cent, SBI chairman Pratip Chaudhuri said.

The decision taken by the RBI also seems to have a shock value for some bankers. Bankers were not expecting the RBI to deregulate interest rates so soon. We are examining the impact as far as cost is concerned. The cost of deposits is expected to go up by at least 20-25 basis points (bps), SC Sinha,executive director,Oriental Bank of Commerce told The Indian Express.

However,bankers hold diverse views over how much the interest rates on the savings rate will move up. While some say it may be as less as 0.25 per cent others expect it to be as much as 2 per cent. But whatever the change may be,it will mostly benefit customers with more than Rs 1 lakh deposits as they will get a better rate of interest but we will see how the market behaves,Sinha added.

By the end of March 2011,the total amount of savings bank balance in the entire banking system was to the tune of Rs 14,46,900 crore. Assuming that interest rates rise by one per cent,banks may have to shell out as much as Rs 14,469 crore as interest earned by depositors, says Jagannadham Thunuguntla,head of Research SMC Global Securities Limited.

In fact,according to SMC Global Securities estimate,public sector banks profits may dip by as much as 50 per cent in the current fiscal if they have to provide more towards higher interest rates on savings account. For instance,the profit before tax (PBT) recorded by Bank of Maharashtra in 2010-2011 may erode by 52 per cent if it pays one per cent more to its savings account holders.

Maintaining that the move will intensify competition among banks,CRISIL said the average interest rate on savings accounts in the banking system to increase by 50 to 100 basis points from 4.0 per cent over the medium term. However,this means increased pressure on banks cost of deposits and profitability, it said.

In the case of large banks such as SBI,the erosion could be as much as 20 per cent. The bank had savings deposits to the tune of Rs 4,09,609 crore at the end of March 2011 and a PBT of Rs 19,910 crore.

On the cards

RBI to implement the recommendations of the Damodaran Committee on customer services,on which a broad consensus has emerged,as also the action points which were identified by the IBA and Banking Codes and Standards Board of India in the last Banking Ombudsmen conference

Commercial banks (other than RRBs) allowed to open branches in Tier 2 centres (with population 50,000 to 99,999) without the need to take permission from the RBI

Final guidelines on the cash settled 5-year & 2-year interest rate futures (IRFs),including the final settlement price by December end

Guidelines on CDS will be made effective by end-November 2011

Norms on short sale in government securities by end-December

Working Group to be constituted to examine and suggest ways for enhancing secondary market liquidity in the G-Sec and interest rate derivatives markets