Tuesday, December 4, 2012

PSU banks under lens for ‘fixing’ savings account rate

Competition Commission of India, the fair play watchdog, has decided to look into the common, 4% interest rate being paid by all public sector banks on savings bank deposits despite the Reserve Bank of India moving to an unregulated regime in October 2011.

"They seem to be acting in tandem and it needs to be investigated. Because of this policy, small depositors are losing out and banks are also losing business," said a CCI official, who did not wish to be identified. 

The official also said that banks such as Kotak Mahindra and Yes Bank, which had started paying up to 7% on savings bank deposits, had seen a surge in inflows. 

According RBI data, five private players, 10 foreign banks and a cooperative bank have increased their savings deposit rate by one to five percentage points. 

For banks, current accounts (CA) and savings accounts (SA) are the steadiest and cheapest source of funds. Banks usually target at least 30% of their total deposits from CASA. 

While they resort to periodically increasing or decreasing term deposit rates, savings account rates were only raised in May 2011 after RBI mandated an increase from 3.5% to 4%. The RBI's move to an unregulated regime a few months later was opposed by most public sector banks. 

By keeping interest rates on savings bank deposits unchanged at 4%, banks have managed to ensure a healthy net interest margin, which is the difference between the cost of funds and the rate at which they lend. This comes at a time when deposit rates have been rising. 

While public sector banks said that they are yet to receive any communication from CCI, the chairman of a top public sector bank dismissed the suggestion of a cartel at work. "Who is paying more? Even ICICI Bank and HDFC Bank are paying the same rate. RBI has deregulated the rate which will not result in an overnight increase or decrease," the chairman said. 

A senior SBI executive added that it was only banks with a small network of branches that are offering higher rates. "It is not class-wise, but size-wise," the banker added. 

Another bank chief said that each bank has its own resource-raising strategy and takes its own decision. "Every bank has its own policy and no one exchanges notes," he said. 

Some public sector players were contemplating an increase in savings bank deposit rates around the time RBI began discussions on deregulating the only remaining regulated rate. But all of them chose against increasing the rate after SBI, the country's largest lender with around a quarter of the business, decided to maintain status quo. 

In fact, in the run up to the deregulation, the Indian Banks' Association, the banking industry lobby group, had opposed the move with some bankers citing the example of other countries which had seen a decline in term deposits after the savings bank rate was de-regulated. 

During a resource management meeting at the RBI headquarters, most banks had opposed the move but the central bank went ahead with the move only to see two banks raise rates on funds lying idle in savings bank accounts.

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