Savings Rate Deregulation…Storm in a tea cup ?

Everyone seems to be in a tizzy over the Reserve Bank of India’s (RBI) pronouncement regarding Savings Bank Account interest rate deregulation. The media has been hunting desperately for juicy sound bytes in this regard, both from industry insiders as well as market “experts”. Well, so far they must be quite disappointed, since no one is really sticking their necks out and projecting any probable scenario….and rightly so, considering that it any move will be made after taking a holistic view of the situation.

In fact the brouhaha may be akin to all smoke and no fire. Here’s why….

Let us place the depositor universe into two buckets: 1. The savvy depositor 2. The lethargic depositor.

The savvy depositor does not view savings bank accounts as investment vehicles. Once money comes into this account, say, through a salary credit, the amount is immediately funnelled away either into short term debt funds or Systematic Investment Plans (SIPs) in equity mutual funds. Only that amount which is required for meeting contingencies and regular expenses is parked in the savings account. This amount usually does not go beyond 20% of the initial credit. Even this amount is partly channelised into ‘Sweep-In’ accounts offered by most banks. Besides, even amounts residing in savings bank accounts are earning interest on a daily basis for the past few months.

Hence another savings account which offers a few hundred basis points more than the current one is not as attractive as it seems prima facie, due to the residual amounts not being very large.

What about the other half? These lethargic depositors allow their money to languish in a savings account merely because they are too lazy or too overwhelmed to take active calls regarding deployment. In other words they passively allocate towards cash. Often they may not even know the balance in neither their account nor the amount of interest they are earning on it. In fact it is this category which is a banker’s delight as they are able to deploy this money onward at mouth-watering spreads.

It is unlikely that members of this category too will shuttle from one bank to another. This is because many of them are too indolent to do so. In fact even the one active account which they have may be their present salary account which the company has opened for them, with the other accounts lying dormant for years.

After the RBI pronouncement, the stock market battered the shares of banks with strong deposit franchises fearing that their spreads would come under pressure and also that newer banks would lure away their cream customers by offering high rates.

However I believe that markets may be underestimating the cunning nature of bankers who have often been derided as ‘crooks in suits’. Banks who offer outsized interest rates may counterbalance this by beginning to charge for those services which are currently free, increase the fees for cheque books/debit cards/Pay Orders, raise the minimum balance required etc. Hence the customer will have to evaluate the impact on an overall basis and not just based on the headline rate.

Yes, the landscape for banks has been looking bleak for some time now on account of rates which have been creeping up and the impending fear of a rise in bad loans. In that context, this particular development may soon appear as no more than a storm in a tea cup.

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