Banks to suggest RBI to reduce savings a/cs interest rate

Last year the Reserve Bank of India (RBI) had issued directives to the banks that the interest rates on saving accounts to be calculated on daily balances and the new directive is to be implemented by April 2010. Ahead of the deadline to implement RBI directive, the banks have requested RBI to lower interest rate on savings accounts to make possible for them to implement the new directives. RBI fixes the interest rate on savings accounts and at present banks are giving 3.5%.

At present the interest is calculated on the average amount maintained from the tenth to the last day of the month as a result the interest cost comes to less than 3.5%. For most banks, the interest cost ranges between 2.5% and 3%. As per new directives when the interest rate will be calculated on a daily basis, the cost of savings account deposit will be the interest rate on savings accounts.

A senior executive from a large PSU bank said, “Banks are of the view that the interest outgo will increase by 50-75 basis points, which could be compensated if they hike the lending rates by 25 basis points. But at the same time, banks would not be comfortable hiking rates only to make up for this. Instead, banks would prefer to wait for RBI signals to hike rates”. In the forthcoming meeting some banks are going to suggest to RBI to continue with the current system i.e. the interest is to be paid on the minimum amount maintained with them.

He added, “Banks will take up this matter with RBI in the forthcoming meeting scheduled on January 14”. RBI deputy governor Subir Gokarn will be meeting CEOs of large commercial banks on Thursday before the credit policy.

For banks Current and Savings Account Deposits (CASA) are the core deposits as these are low-cost lend able resources. The banks having higher ratio of CASA deposits are considered to be strong in comparison to those who are dependent on fixed deposits and wholesale funds. It is believed after April 1, banks with higher CASA deposits will get badly affected. The low-cost deposits comprise more than one-fourth of bank deposits. For instance, SBI CASA ratio is as high as 42%, ICICI Bank has a CASA of 37% whereas PNB ratio is around 40%.

Bankers are not in favor of implementation of new directives on savings rates as they fear that this can generate a rate war as up coming banks are hiking interest rates on savings accounts to grow market share.