Unkindest cut

For the first time since interest rates on savings accounts were deregulated in October 2011, India’s largest lender, the State Bank of India, has moved to lower the rate, which was hitherto kept at 4 per cent by nearly all banks. SBI’s unceremonious cut of 50 bps in the savings deposit rate, impacting 90 per cent of its depositors, has now set the ball rolling for others to follow suit. With rates on FDs plummeting by more than 2 percentage points over the past two years, a fall in the savings deposits rate as well is bound to pinch the large population of Indian savers. To be fair, banks, flush with funds post-demonetisation, had good reason to slash fixed deposit rates over the past year. But with the excess liquidity gradually draining out of the system, banks are now caught in a peculiar situation. After lowering lending rates by 80-90 bps in January, the higher incremental funding costs in recent months has started to hurt. Since raising lending rates would seem bizarre, SBI has now found a novel way to cushion margin pressure, and earning a pat on the back from other lenders. Therein lies the crux of the issue. Banks’ tardiness to lower loan rates in a rate easing cycle or tightfistedness in raising deposit rates during a rising interest rate cycle, has been drawing the ire of the Centre and the regulator, and rightly so. Rather than being driven by commercial sense, banks’ rate actions have often followed a harmonised pattern. For instance, had SBI not cut its lending rate sharply in January, others would have continued to drag their feet, despite having the leeway to act on their own.

Since 2011, there have been two rate hike cycles, neither of which nudged lenders to raise rates on savings deposits, which makes the current cut particularly unkind. But whether the move is driven by business sense or otherwise will be hard to ascertain. Rather than scrutinise banks’ pricing decisions, which the RBI intends to do, the focus should be on ushering in greater competition in the banking sector. Granting new licences has helped break the inertia to some extent, with new players wooing customers with higher rates on deposits. But to serve the larger population of savers, the shake-out has to be driven by existing players. Strong balance sheets and full operational autonomy is a must if public sector banks have to stay committed on commercial discipline.

For savers, SBI’s cut should serve as a wake-up call, one that nudges them to consciously shop for higher returns, rather than letting funds idle in savings accounts. For the economy at large, pushing household savings to financial assets can provide a fillip to investments. But the real interest rates that are high now on account of very low inflation can slip into negative territory, thus disincentivising savings. Banks and the regulator need to take a longer-term view on inflation before embarking on steep cuts.

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