How often have you given a thought to the balance in your savings account? For most of us and our banks, the only concern has been to ensure the minimum balance in our savings accounts. For us it is to avert a penalty and for the bank it is to ensure minimum yield. That too if it is not a zero-balance salary account. In rural India, new bank account holders are familiarized with their savings account which is usually a 'no-frills' one. Here the concept of minimum balance anyways does not exist. However, the age-old savings account may no longer be subject to such negligence by us or our bankers. The central bank Reserve Bank India(RBI) has now resolved to make the account more dynamic to suit our inflation cover and the bank's competitiveness.
Meet your new savings account...
The interest rate on savings account that has remained unchanged at 4% for nearly 8 years is finally becoming more dynamic. Known to erode wealth during times of high inflation, the savings bank account may now get rid of this vice. The banks will now start offering interest rates that will be commensurate with the level of inflation in the economy. While up to a base limit of Rs 1 lac, there will be no competitive pressure amongst banks, funds above this threshold may entail a more lucrative interest rate. That in result will entail heightened competition amongst banks. For deposit holders, this means getting a reasonable risk free return on the base limit (of Rs 1 lac) and more lucrative returns for larger sums parked with the bank. There will however be no differentiation amongst retail and institutional depositors, which is another positive.
What does the new account mean for your bank?
Typically banks with high CASA (current and savings account) base managed to sustain a higher net interest margin (NIM) during times of high interest rates. This was because a large portion of the deposits came at very cheap rates. Moreover the CASA rate remained fixed irrespective of the level of inflation and rate hikes in lending. However, going forward, sustenance of high margins will be a factor of the bank's market share as well as pricing power.
How will this impact banking stocks?
Unlike common belief, we do not think regulated savings account rates are an outright negative for banks with high CASA. For most of these players do not consider the savings account in itself to be a highly remunerative product. However, the account does act as a medium of sourcing new customers for other services and offerings. Hence, we believe that banks that have the lead in CASA base may temporarily feel the pressure of higher costs. However, over time they will be able to pass on the same to their customers.
Thus, the new savings account is more of a reflection of banking product in a dynamic economy, rather than a game changer for the competitive scenario in Indian banking sector.