One of the biggest impacts that the demonetization exercise of 2016 has had has been on the borrowing & interest earned by banks from various business & retail loans. There’s no denying that stagnant growth in loan – any bank’s primary driver of revenue is not a good sign and net interest margin or NIMs are adversely affected. With the loan:deposit ratio dropping across the board, poor loan growth and compressing spreads, banks are looking at the possibility of lowering the savings interest rates.
As many Indian Banks look to lower savings account interest rates due to influx of funds in savings accounts post demonetization, it threatens to impact the broader financial economic landscape of India. Growth in loans has been stagnant and is making banks to look at the possibility of lowering the interest rates on savings bank accounts so as to improve their pre-provision operating profits.
Most investors view valuations and weak earnings growth for the sector as an immediate headwind. Give the longer-term investment agenda evident from the government‘s various ongoing initiatives & investors’ misgivings about the lack of asset quality resolution could stall the medium term loan growth for the banks. According to a report, a 50 basis point cut in savings rate would result in around 8 per cent improvement in the sector’s core pre-provision operating profits.
Most Public Sector banks in India currently offer four per cent interest on savings bank accounts, while some of the private sector banks offer a much higher rate. Take for instance, Kotak’s 811 account – a first of its kind savings account that you can install on your phone & begin using in under 5 minutes.
While higher interest rates of as much as 6 per cent can be quite attractive for the liquidity that savings accounts provide, many of these high interest savings account have minimum average quarterly balance requirements and are worth looking into. Ultimately, the primary purpose of the savings account is more critical than the interest rate it provides.