Up to a decade ago, the interest rate on savings bank accounts was something that could be changed only by the Reserve Bank of India (RBI). That changed six years ago, when the RBI deregulated savings bank interest rates. Since then, private banks have offered rates up to 7% in their bid to gain customers. This is the first time a bank has cut savings account rates. On Monday afternoon, India’s biggest bank, State Bank of India (SBI), cut interest rates on its savings account by 50 basis points (bps).
In a statement the bank said that accounts with less than Rs 1 crore would now earn 3.5% as interest as against 4% so far; accounts with over Rs 1 crore will continue earning 4%. The move will save India's biggest bank at least Rs 400 crore a year in outgo.
The main driver: demonetisation, which led to large inflows into SBI’s savings and current accounts during November and December last year. SBI’s March 2017 quarter’s standalone saving bank deposits stood at Rs 7,43,286 crore. On a three-year compounded annual growth rate basis, this is a 13.09% jump over the quarter ended March 2015 where it was Rs 5,13,905 crore. Another reason is that lower-than-expected inflation (consumer price index inflation came in at 1.5% for June) has driven up real interest rates (inflation-adjusted).
With credit growth at a low ebb and SBI still reeling under its bad loan portfolio, the best option chairperson, Arundhati Bhattacharya (who also tops Fortune India's Most Powerful Women list) seems to be left with is capitalise on its retail business, especially from rural areas.
Among all the banks, SBI has the most significant presence in the hinterland; in many parts of the country it is the sole bank for miles. Two-thirds of its accounts are in semi-urban and rural centres which make up a third of the bank’s deposits. SBI accounts for 16.03% and 18.82% of the banking industry's rural and semi-urban presence.
According to RBI’s bank-group and population-wise data for March 2016, SBI and its associate banks held deposits worth Rs 21,13,275.71 crore in 4.35 lakh accounts. And more than half of the accounts were held by users in semi-urban and rural areas—68.68%. But with regards money deposited, the share of rural and semi-urban centres together accounted for 35.29%.
Now, if we consider SBI’s consolidated saving account deposits of Rs 1,81,890.90 crore from non-bank saving deposits as of March 2017, the rural and semi-urban share of 35.29% (Rs 64,189.30 crore), 50 bps reduction in rate works out to be a saving of Rs 320.94 crore in interest outgo.
Although the bank might be making a small saving on the rate reduction, it is looking at the inevitable prospect of account users migrating to competitors with higher rates. So as a user what should you do?
Don’t just look at the 50 bps cut. The bank has made other changes over the past year or so. In November it reduced the rate on term deposits with tenures between 1 year and 10 year to 4.25%, way lower than its competition. And in April this year, the bank increased the minimum amount to that needs to be maintained in savings accounts to Rs 5,000. It also introduced a quarterly charge for sending SMS to account holders. “We encourage people to move to FDR (fixed deposit receipts) as we expect less volatility and better facilitation due to our strong reach, distribution and franchise network,” Rajnish Kumar, managing director-national banking group, SBI said in the statement announcing the changes. SBI offers between an annual 3.75% and 4% for fixed deposits with tenures below one year and 4.25% per annum for those above 1 year, which is much lower than its competitors. Hence, it makes sense to move away to other private banks which offer higher interests, on both savings accounts as well as fixed deposits.
With private sector players such as RBL Bank bending over backwards to entice new customers with higher deposit rates, and services like Paytm packing their apps with goodies, SBI seems to be taking a different route. However, only time will tell if this strategy will indeed pay off.