India’s ’Big Bang’ Will End Lazy Banking
Advertisement

India’s ’Big Bang’ Will End Lazy Banking

By James Lamont

  • 28 Oct 2011

The winners and losers of India’s ‘big bang’ savings deposits deregulation appeared to be clear within moments of its unheralded announcement in Mumbai on Tuesday.

The share prices of nimble, private banks eager to expand their market share in retail banking climbed. Those expected to prosper amid greater competition included Yes Bank and Kotak Mahindra, alongside international banks such as HSBC, Citibank and Standard Chartered.

Large cap, state-controlled banks, by contrast, suffered an abrupt sell-off. The State Bank of India, Punjab National Bank and HDFC Bank immediately shed about 4 per cent from their share prices.

Advertisement

The modernising move by Duvvuri Subbarao, the governor of the Reserve Bank of India, to unleash competition for the nation’s savings accounts is a mixed blessing for them.

The end of decades of regulated interest rates will raise the cost of funds and squeeze margins, and leave their customer base in urban India open to better offerings from low-cost rivals from the private sector.T

The reform, one of the biggest in the industry for years, will favour banks with better technology, bold marketing strategies and the impulse to innovate. It will also play to private sector expertise and experience of other markets where fiercer rivalry for depositors’ funds is the norm, according to analysts.

Advertisement

“There will be a shift from lazy banking, focused exclusively on saving rates, to a more aggressive model where banks will try to attract new customers and lend more,” says Deven Choksey, a stockbroker in Mumbai.

The prospect of aggressive marketing of competing interest rates on savings accounts to India’s 1.2bn people has sent a shudder through India’s state-owned banks. The regulated rates were widely regarded as their safety net.

Many of them are lumbering, personnel-heavy institutions with big branch networks and high costs. They have enjoyed for years a banking model where profits were generated from government-set interest rate margins rather than more service-friendly offerings or fee-based income.

Advertisement

A socialist-style market where interest rates on savings deposit accounts were universal, and under-priced, has now come to an end. They were 4 per cent in an economy where the central bank lends to commercial banks at 8.5 per cent and inflation is near 10 per cent.

Before May, the savings rate had been unchanged for eight years at 3.5 per cent.

“Bankers should not be surprised by this,” says Mr Subbarao. “It was a good thing to do. This was the last interest rate that remained regulated.”

Advertisement

The deregulation is expected to add as much as one or two percentage points to interest rates on savings deposits.

“It’s a very interesting move. It’s clearly a path-breaking move by the RBI,” says Uday Kotak, managing director of Kotak Mahindra. “It will have positive and negative [effects] for individual banks. It’s positive for our bank but for the banking industry as a whole it leads to higher cost of funds.”

However, he cautioned that India’s banks, which have to submit to mandatory lending targets to approved sectors, still had a long way to go to “true liberalisation”.

Advertisement

Some analysts predict the policy change will inflict severe damage on the profits of some banks.

Jagannadham Thunuguntla, head of research at Delhi-based SMC Global Securities, calls the RBI’s move as a “game changer” that could cut the profit of some Indian banks by up to 50 per cent if interest rates on savings accounts rise just one percentage point.

“The additional interest that banks need to pay on savings bank accounts will reduce the profitability of the [entire] banking sector by 12.85 per cent. That’s quite a significant reduction,” he says.

The country’s top public sector bankers put a brave face on a move that largely caught the financial community, preparing for the Diwali festival, off guard. They said that they did not expect a significant shift of deposits to rival banks.

Pratip Chaudhuri, the chairman of the SBI, India’s largest bank, says savings accounts were largely used by the bank’s customers as transaction accounts and that opportunity to shift to higher fixed-interest accounts already existed.

“I do not think there is a stampede out of savings accounts,” he says. “Most of the banks are fairly comfortable with liquidity [and will not strain their balance sheets].”

More News From Financial Times

 

 

 

Share article on

Advertisement
Advertisement
Google News Icon

Google News

Follow VCCircle on Google News for the latest updates on Business and Startup News