The deregulation of saving account interest rates by the Reserve Bank of India has suddenly livened up the banking sector. We are seeing aggressive advertising campaigns by Kotak Bank followed by even more aggression by Yes Bank. Kotak must have got the first mover advantage but it was short-lived since Yes Bank overtook them immediately in its offerings. 6% by Kotak vs 7% by Yes Bank.
The difference though has been the communication medium. Kotak has gone for the expensive television medium whereas Yes Bank has been content with the relatively less expensive newspaper. I may have missed Yes Bank’s TVC but I doubt if there is any TVC talking about 7% interest rates on saving accounts. Kotak’s “subbu sab jaanta hai” campaign has a smart insight which though obvious was a master stroke. Take 6% which is more than the existing 4%. I liked the “50% more” perspective. Isn’t it obvious yet none of must have thought about it. And it still seems true that in spite of all the information regarding financial products, people are convinced when an individual endorses it or rather propagates it i.e. Subbu in this case.
Anyway moving from the marketing standpoint, to the financial or economic view. I am no economist or no student of economics but having been through the crisis of 2008 and subsequent happenings in the various developed economies and financial markets, have worries about the direction banking sector is taking in India. Though tightly regulated by the RBI, hope it does keep an eye of this price war. My doubt stems from the fact that will the banks be able to sustain such a high interest rate when other banks have not followed suit. As they say “there are no free lunches”, there cannot be high returns without high risk. There is a chance that banks will or might take higher risks to be able to cater to its offerings and parallely maintain profit margins or even increase them. It might work in the short-run but there is a systemic risk like in 2008 and now in Europe.
It also should not result in the kind of price wars which are bleeding telecom companies. The customer gains at the cost of future stability of the company. It doesn’t seem likely as the larger private banks and PSUs have not entered the savings account war. It could put pressure on the mid-segment banks that would be forced to up the savings rate to keep abreast with immediate competition and increase their account holder base and spread its base wider.
The RBI as said earlier should keep itself on its toes to avoid any untoward incident happening which might result in necessity of a tax-payer funded bail out.
Smaller banks like Kotak and Yes can afford to pay higher savings rate interest as their marginal cost of funds as evidenced by their borrowings in wholesale market would be higher than the rates being offered by them for the savings product.
ReplyDeleteBesides, savings account provides granularity to a bank's deposit base which wholesale borrowings do not. Not only this, savings accounts provide these banks an opportunity to cross sell their other lucrative products which is not possible in wholesale funding.
All in all, higher savings bank interest by these tech saavy, new generation better managed banks is a win win situation for the system, the banks concerned as also for customers. The only losers are lenders of wholesale funds for whom a source of incremental returns diminishes.
Mr.Rana Kapoor of Yes bank was not much off the mark when he said on this reform: " The days of lazy banking (and lazy bankers ) are over."
: Snehal Dani.
Nice info Snehal.. i have my doubts though.. if smaller banks can afford to pay higher savings rate, larger banks should be able to afford even higher considering the economies of scale.. moreover savings funds are volatile compared to fixed deposits.. so ROI on it may not be as high as it seems on the face of it.. cross-selling is a valid point, yet wholesale funding would have less risk compared to retail. Anyway i am worried about the incremental returns banks would have to give to retail investors and whether it is sustainable considering low interest rates worldwide except for developing nations and the kind of returns banks would have to have to justify their offering. And yes, lazy banking days are over, it is survival of the fittest again.
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