Decline in govt banks’ deposit share may accelerate

High share of PSBs in deposits has weighed on their cost structure, which the rate cut will correct

The interest rate cut on savings deposits by the country’s largest bank, State Bank of India (SBI), would have a positive implication on its margins in the short-term.

Public sector banks’ (PSBs’) liability franchise, which has proved to be more resilient over the years than their lending business, is likely to see a decline, as depositors move their savings to banks and instruments offering higher interest rates.

Other PSBs are also likely to cut rates on savings accounts, which, analysts say, will not be a bad thing for them. “SBI may lose some of the current and savings deposits to its competitors in due course, but this is exactly what the bank wants to achieve, given the poor loan growth in the last few years. A steady rise in deposits — in the absence of loan growth — was eating into the bank’s interest margins, and a rate cut on savings deposits may help cushion that blow in the short-run,” says Dhananjay Sinha, head-institutional research and economist, Emkay Global Financial Services. However, he doesn’t rule out the possibility of a hike in interest rates once the credit demand picks up.

In the last three years, PSBs’ share of bank deposits is down only 240 basis points (bps), after holding steady for eight years. Private sector banks have taken away some of the PSBs’ share of bank deposits by offering higher interest rates. In comparison, PSBs’ share in advances declined by 480 bps in the last three years.

One basis point is one-hundredth of a per cent. The government-owned banks’ share of incremental bank deposits declined to an all-time low of 32.4 per cent in FY16 and recovered to 45.4 per cent last fiscal year in the wake of demonetisation. The decline was led by savings account deposits, where PSBs’ share declined by 320 bps in the last three years to an all-time low of 78.7 per cent at the end of FY17.