Could SBI’s Savings Rate Cut Be An Opportunity For India’s Small Banks?

India's smaller banks have been presented with a rare opportunity to capture a larger share of low cost deposits, which have so far been the preserve of the bulge bracket lenders. On Monday, the country's largest lender State Bank of India (SBI) cut the interest rate on savings accounts by 50 basis points to 3.5 percent. Other lenders including Bank of Baroda and Union Bank of India told BloombergQuint that they will consider the possible impact of SBI's decision at meetings of their asset-liability committees (ALCO) this week.

In the past, large lenders have typically matched the rate set by SBI. If that continues, smaller banks, which currently offer upto 2 percentage points more on savings account deposits, could stand to gain.

Gautam Chhugani, senior analyst - India Financials at Sanford C. Bernstein says that some small and mid-sized banks, still hungry for low cost deposits, could choose to hold on to their rates. In a report on Monday, Chhugani noted that banks like Kotak Mahindra Bank, IndusInd Bank and RBL Bank could choose to keep interest rates steady even if larger banks follow SBI's lead.

Current account savings account (CASA) deposits are low-cost funds for banks and considered to be a stable base of deposits. Because customers tend to use savings accounts for convenience rather than investment gains, garnering a share of this pool of savings has been tough. 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. Credit Suisse, in its report released on Tuesday, noted that there is a risk that the deposit rate cut could accelerate market share losses for PSU banks on the liabilities side.

Smaller banks, however, are treading cautiously.

Rajeev Ahuja, executive director at RBL Bank suggests that the bank will follow a strategy aimed at maintaining margins. RBL Bank offers a savings account interest rate ranging from 5.5 to 6.75 percent, depending on the quantum of the balance held.

The savings account interest rate was deregulated in October 2011. Until then, the RBI dictated the rate offered on these accounts since they were considered to be the most basic of banking services. However, in the interest of moving away from administered rates, D. Subbarao, who was governor of the RBI at the time, deregulated the rates.

Despite deregulation, most large banks chose to hold the rates at 4 percent. Smaller banks, however, increased their saving deposit rates in an attempt to garner market share. They have seen some success.

Kotak Mahindra Bank, the first to offer a 6 percent interest rate on savings accounts worth Rs 1 lakh and above, increased the share of CASA deposits to 43.9 percent currently from 28 percent in December 2010.

Yes Bank, which initially offered a 7 percent rate on savings bank accounts following RBI's deregulation, has pushed up its CASA ratio to 36.8 percent as on June 30, 2017, as compared with 10.2 percent as on December 31, 2010. During these years, the bank has consistently tweaked its interest rates and now offers 6 percent on all savings bank deposits up to Rs 1 crore.

Senior officials at Kotak Mahindra Bank and Yes Bank declined to comment on the story.

Some small finance banks, which started operations over the last few months, also offer a higher interest rate on their savings bank deposits to attract more customers.

AU Small Finance Bank presently offers a 5-6.5 percent savings account rate and will continue with this for the time being, said managing director and chief executive officer Sanjay Agarwal. “If the biggies are moving the rates downward, it is a good opportunity for us to grow our book, Agrawal said. He, however acknowledged that rates are not the primary driver of savings account balances.

Samit Ghosh, managing director and chief executive officer, Ujjivan Small Finance Bank also believes CASA deposits are less rate sensitive and move depending only on service. Ujjivan will continue to focus on these aspects of building a deposit franchise and will continue to offer a 4 percent interest rate, Ghosh said.

Apart from the risk of a shift in savings account balances between different banks, lenders could also face competition from other financial instruments.

“We also believe that this will act as another nudge to bank depositors to explore alternatives such as insurance and mutual fund products,” said Kotak Institutional Equities in a report on Tuesday.