Repo and Reverse Repo rates increased Saving bank Interest deregulated

1. RBI has increased Repo and Reverse Repo rates by 25 bps in the credit policy.

2. Besides that, RBI has also deregulated interest rates on Savings bank accounts. Currently, banks pay interest rate of 4% on the savings bank accounts. Post this deregulation, the interest rates on Savings bank accounts bound to move up. This can have quite serious implications on the profitability of the banking system. We have attempted to summarize in this report the underlying implications with this deregulation of interest rates on Savings bank accounts.

3. By 31st March 2011, the total savings bank balance in the entire banking system is to the tune of Rs 14,46,900 Crores.

4. After this deregulation, there are various views regarding by how much the interest rates on the savings rate will move up. There are diverse views regarding by how much the interest rates on the savings account can move up, ranging from 0.25% to 2% rise. This report is made assuming that over a period of time, the interest rates on the savings bank account will rise by 1%.

5. If the interest rates on savings account move up by 1%, then the additional interest that all the banks put together needs to pay about Rs 14,469 Crores.

6. The total Profit Before Tax for the Finanical year 2010-11 of all the banks put together is to the tune of about Rs 1,12,612 Crores.

7. Hence, the additional interest that banks need to pay on savings bank will reduce the profitability of all the banking sector by 12.85%. That's quite a significant reduction. Hence, in short term, it can be said that the deregulation of interests rates on Savings bank accounts is a real game changer.

8. Assuming a 1% hike in the Savings bank accounts, the impact of this deregulation on interest rates can be quite serious on the banks such as Bank of Maharashtra (where profits can fall by 52%), DCB (by 37%), United Bank (by 35%), Dhanlaxmi Bank (34%), SBI (by 21%), etc.

9. To handle this scenario, there is a good chance that going forward, banks will focus on garnering Current bank accounts.

10. Already banks are under pressure with slow growth in the loan books and high interest rate cycle. In that backdrop, this deregulation on savings bank accounts will be a new bullet to bite for the banking system.

11. While this deregulation of savings bank accounts is surely a Diwali gift for general public and bank customers, this surely is one more body blow for the banking system to handle.
A report by SMC  Globel

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Income Tax India: Repo and Reverse Repo rates increased Saving bank Interest deregulated
Repo and Reverse Repo rates increased Saving bank Interest deregulated
Income Tax India
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