NEWS & ADVICE : FIXED DEPOSITS
Daily interest on savings account to affect the margins of banks
By Neelima Shankar
Apr 1, 2010
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Interest on savings account deposits would be calculated on a daily basis with effect from today. The savings account holders are definitely having a cheer time. They will earn more on their deposits from today.

This news though is not a matter of rejoice for the banks as their margins are going to be affected with the incorporation of this new method.

Banks would also have to undergo a number of changes which include new norms for loan pricing which is going to come into effect with the base rate coming into play from July.The base rate will takeover the prevailing BPLR System of lending.

The banks also need to gear up for preparation for following the International Financial Reporting Standards, the guidelines for which are still to be issued by RBI.

The fiscal ended yesterday, saw banks manage their net interest margin through steep deposit rate cuts since the third quarter of 2008-09.

Till yesterday interest on savings account was calculated as per the prevailing rate of 3.5% on the minimum balance in the account from 10th to last day of the month. The daily basis calculation would earn the customer as much as 16-18% more from savings account which would increase the cost of the bank.

"Assessing the additional growth in amounts in saving accounts, the outgo will be more. This poses a huge challenge," a senior SBI official said.

Most of the public sector banks which have a NIM between 2.7% to 3.62% are going to face a tough time. The Government has expectations that they maintain their NIM at around 3%. Increasing costs would thus put them under pressure.

Lending rates have another pool of pressure coming up for banks. According to D R Dogra, managing director and chief executive of CARE, the private banks have a BPLR between 3 to 4% which is higher than the public counterparts. Given the base rate system of lending, private banks are thus to be on a disadvantage.

"We expect base rates for most banks to be in the range of 7-9 per cent. The overall impact of the base rate system is unclear at present due to availability of alternative sources of funding for corporates," CARE said.

 


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