Analysis of Small Banks Offering Higher Interest Rates than Larger Banks to Attract More Deposits
Analysis for Layman
Smaller Banks with Limited Branch Networks Are Offering Higher Interest Rates on Savings Accounts Compared to Bigger Banks. For Example, Smaller Banks Are Offering 7-7.5% on Savings Accounts While Bigger Banks Are Offering 7-7.2% on Fixed Deposits.
This Illustrates the Increasing Competition Amongst Banks for Deposits as Credit Growth Is Happening Faster Than Growth in Deposits. Smaller Banks Are Using High Savings Interest Rates as a Tool to Acquire More Customers and Deposits. This May Lead to the Percentage of Low Cost Current and Savings Account (CASA) Deposits Falling Faster at Big Banks Compared to Small Banks.
Impact on Retail Investors
For Retail Investors with Savings Accounts at Small Banks, This Is Positive News as They Can Earn 50-100 Basis Points (bps) Higher Returns Than Fixed Deposits at Big Banks. Investors Should Compare Interest Rates Offered Across Banks and Open Savings Accounts at Ones Offering the Best Returns.
However, Retail Investors Should Also Evaluate Safety of Deposits Before Chasing Highest Rates Blindly. Small Banks Have Higher Risk So Assess Strength of Bank by Checking Ratings, Financials, Management Quality Before Investing.
Impact on Industries
This Rising Interest Rate Environment Is Challenging for Rate Sensitive Sectors Like Housing, Auto and Consumer Durables Where Demand Slows Down as Borrowing Rates Increase. Banks Also See Pressure on Margins as Funding Costs Rise Faster Than Yields on Advances.
Among Banks, Smaller Private Banks and Niche Banks Are Better Placed to Withstand Pressure as They Rely on Low Cost CASA Funding. Larger Banks Face Competition for Deposits, Pressuring Margins. Rate Sensitive Stocks Like HDFC, LIC Housing Finance, Mahindra & Mahindra Financial Services Could Be Impacted.
Long Term Impact
In the Long Run, Competition from Small Banks May Force Large Banks to Also Offer Higher Savings Rates to Retain Deposits, Compressing System-Wide Margins. Banks May Have to Improve Lending Efficiencies and Fees Income to Protect Profitability if Higher Funding Costs Persist.
Short Term Impact
In the Short Term, Large Banks May See Faster Erosion in Low Cost CASA Deposits Compared to Small Banks, Pressuring Margins. They May Also Lose Some Retail Savings Accounts to Smaller Banks Offering 50-100 bps Higher Rates. This Margin Pressure Is a Negative for Big Banks in the Next Few Quarters.
Potential Impact of Higher Savings Account Rates at Small Banks
While the news directly affects individual banks, analyzing gains and losses for specific listed companies requires considering broader market dynamics and each bank’s individual characteristics. However, we can explore potential impacts on different categories:
Indian Companies Potentially Gaining:
- Small Banks Offering High Savings Rates: Banks like RBL Bank, DCB Bank, and Karur Vysya Bank might see increased deposit inflows as their attractive savings account rates draw customers from larger banks. This could improve their CASA ratios and potentially offer them cheaper access to funds, boosting profitability.
- Digital-Focused Banks: Fintech-driven banks like Niyo and IDFC First Bank, already offering high-yield savings accounts, could solidify their competitive advantage and potentially attract tech-savvy customers seeking better returns.
Indian Companies Potentially Impacted:
- Large Banks with Lower Savings Rates: Larger banks like HDFC Bank, ICICI Bank, and SBI, offering lower savings rates than some smaller competitors, might experience slower deposit growth or even outflows. This could increase their reliance on costlier fixed deposits and potentially squeeze their net interest margins.
- Banks with High Reliance on CASA Ratios: Banks like Kotak Mahindra Bank and IndusInd Bank, already boasting strong CASA ratios, might be less impacted by the competitive landscape. However, they might need to re-evaluate their interest rate strategies to retain existing customers.
Global Companies:
- Foreign Banks Operating in India: Global giants like HSBC and Citibank India, facing similar competition from smaller banks, might need to adjust their savings account offerings or adopt targeted marketing strategies to retain customers.
Market Sentiment:
- Increased Competition: The news highlights intensifying competition in the Indian banking sector, potentially leading to more innovative offerings and ultimately benefiting customers.
- Uncertainty for Large Banks: Investors might express concern about potential deposit erosion at larger banks, impacting their share prices in the short term. However, banks with strong fundamentals and competitive strategies might see less impact.
It’s important to remember that this analysis is based on limited information and the actual impact on individual companies and market sentiment will depend on various factors like competitive responses, economic conditions, and individual bank performance. Conducting further research and considering individual bank financials and strategies is crucial before making investment decisions based on this news.
Citation: ET Bureau, “Some Small Banks’ Returns on Savings A/Cs Top FD Rates of Bigger Peers”, Dec 22, 2023.