India's govt banks won't increase savings interest rates

Public sector banks are will not raise interest rates as they are convinced their customers will remain loyal.

They are also wary of an increase in the cost of funds, which would put pressure on their net interest margins.

State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, UCO Bank, Indian Overseas Bank, Syndicate Bank, Indian Bank, Dena Bank and Bank of Maharashtra are some of the public sector banks that announced they don’t have any immediate plans to raise the savings bank deposit rate.

Public sector banks control more than 70 percent of India's banking deposits.

“Public sector banks are not in a hurry to raise rates because the savings deposit balance remains stable. We don't expect migration of customers in numbers because of a difference in rates. A few customers in metros may switch banks but we have many branches in rural areas, where no other bank is present,” said A Krishna Kumar, managing director, State Bank of India.

The second largest lender, Punjab National Bank, also made it clear it was not in a hurry to review the rate. “The RBI has recently deregulated the savings bank rate. We are waiting and watching what is happening in the market. We are not in a hurry to review the rate,” said chairman and managing director K R Kamath.

Following the deregulation of the savings bank deposit rate last month, a few small private sector banks, YES Bank, IndusInd Bank, Kotak Mahindra Bank and Ratnakar Bank, immediately hiked the rate to boost their low-cost deposit franchise. Current account and savings account deposits constitute the low-cost deposit base of banks. Banks with a higher current account and savings account enjoy a relatively low cost of deposits.

Other than those having raised the rate, banks offer four per cent on savings bank deposits. A rate hike would put pressure on the costs and hence margins.

“Our view is four per cent is the optimum level because of the cost of maintaining these accounts. Our asset-liability committee feels this is not the right time to raise the rate. Once interest rates on term deposits start coming down, it will be the right time to jack up the savings deposit rate,” said T M Bhasin, chairman and managing director, Indian Bank.

“Customers in this segment are less rate sensitive. Many have relationships with us for decades. For a few basis points, they will not abandon us,” said M G Sanghvi, executive director, Bank of Maharashtra.

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