Now, Demonetisation May Eat Into Your Savings Account Rate

 A savings deposit is the most basic of banking products. Everyone who has a bank account has one. It’s also the place where millions of Indians, not well versed with more complex financial products, keep their savings. For those reasons, the interest rate on savings deposits was kept regulated well after the setting of all other interest rates was left to market forces.

In October 2011, D Subbarao, the then governor of the Reserve Bank of India decided to deregulate the savings deposit rate.

In the five years since, most major banks have kept their savings deposit rate unchanged at 4 percent. While smaller private banks have experimented with higher rates, the top banks have all retained the rate at 4 percent irrespective of liquidity conditions.

It now looks like banks may be considering moving on this crucial rate. Only, the move being considered is a cut rather than an increase.

In a conversation with BloombergQuint, Arundhati Bhattacharya, chairman of State Bank of India, the country’s largest bank, said that liquidity conditions have changed substantially due to the withdrawal of Rs 500 and Rs 1000 notes.

The demonetisation decision, announced on November 8, has led to nearly Rs 13 lakh crore in old currency being deposited into banks. Bankers estimate that a material amount of these deposits may not flow back out, which will lead to a durable change in the liquidity position of the banking sector.

“I think the jury is still out on how much of the deposits will flow back out. At one point, I thought about 15 percent will remain. But some of the other bankers feel that more than 30-40 percent of the money coming into savings bank accounts may not flow back out...” said Bhattacharya while adding that if the increase in digital transactions sticks, then about 30 percent of the cash may stay back in the banking system.

When asked whether the additional liquidity will prompt bankers to cut the savings deposit rate, Bhattacharya said that it is possible.

SBI had savings account deposits worth Rs 6.41 lakh crore as of end of September 2016, showed an analyst presentation made by the bank after its quarterly earnings. This was 34 percent of its total deposit base of Rs 18.6 lakh crore.

It’s difficult at this point of time to say which way we will move but it is definitely something that we need to look at given that there is so much liquidity and there is so little credit offtake. We do want to incentivise people to start taking loans. And to do that, we need to bring down the rates of interest.

Arundhati Bhattacharya, Chairman, State Bank of India