The first to create a flutter in the market was Airtel Payments Bank, which has been offering 7.25 per cent on savings deposits. Two new small finance banks, Suryoday and Equitas, which started banking operations recently, are offering between 6 -7.50 per cent for a one to two year deposits. Savings deposits are classified as 'low cost deposits' offering around 4 per cent along with current accounts (CASA).
Big established banks like SBI and HDFC Bank offer 4 per cent on savings deposits. The banks relies on low cost savings and current account deposits to reduce the cost of funds. In the past, when new banks like Yes and Kotak bank offered higher rate, the existing large banks didn't join the competition because any upward change in rates have implications on cost of funds as they have a large deposit base.
The competition is not restricted to savings deposits alone. These new banks have also stormed the fixed deposit market with higher rates. Suryoday and Equitas are offering 8.75 per cent to 9 per cent for a 1-2 year deposits as against SBI and HDFC Bank's 6.25 -6.95 per cent.
The higher rate offered by new banks is clearly to create a base of public deposits. In fact, the very fact that many of the micro finance and NBFCs have converted themselves into banking entities is because of the advantage of accepting deposits. The game plan is to first create a deposit base by incurring additional cost and later once there is a critical mass, revert to the market rate.
Most of the existing full scale banks aren't doing well on deposits front. As per the available statistics, the deposit growth of banks have almost halved from 13.8 per cent five years ago to 7.6 per cent. In fact, PSBs are the biggest losers with their deposits slumping from 13.1 per cent to 4.6 per cent. One of the reasons for decline is the plunging households savings. The household savings as a percentage of Gross National Disposable Income ( GNDI) has declined from 23 per cent to 18.76 per cent. The challenging economic environment and higher inflation in the last few years have been eating away the incomes of people.
The arrival of new banks - almost two dozen - in the next one year will only add to the woes of existing banks. The percentage share of CASA to the total deposits of banks is on the decline, stagnant in some cases and seeing a marginal increase in very few cases.
The new banks are going to aggressively offer a higher rate to build CASA deposits. Experts, however, are a bit skeptical. Take for instance, the payments banks have a very limited scope to deploy the funds. These banks have to deploy 75 per cent of their funds in G-sec where the short term returns are less than 7 per cent. These banks have to find ways to compensate the loss by doing more transaction banking like payment of utility bills, insurance premium and selling third party products like selling insurance etc.
In the case of small finance banks, the rates are though high but makes sense in the short run because most of the small finance banks comes with the micro finance institutions where there cost of fund was very high. They actually borrowing from banks then lending to retail borrowers. In the next few years, the existing banks have to live with this rate war. It's only going to intensify.