(Updates with Ernst & Young comments in fourth paragraph.)
Oct. 25 (Bloomberg) -- India’s central bank said it will let lenders set rates on savings bank deposits, a move that may narrow profit margins as competition for funds drives up costs.
Banks will be allowed to set differentiated rates on deposits of more than 100,000 rupees ($2,010), the Reserve Bank of India said in a statement following its monetary policy review today in Mumbai.
The move marks the final step in a process started in the early 1990s to deregulate India’s interest-rate regime as the Reserve Bank seeks to increase competition among banks and improve returns on household savings. The nation’s benchmark gauge for bank stocks shed 2 percent on concern that loan profitability will shrink as funds become more expensive.
“The cost of raising deposits for the banking system will certainly go up,” said Ashvin Parekh, national leader for global financial services at Ernst & Young LLP’s Indian unit. Banks’ margins will shrink in the “short to medium term,” he said, without specifying the timeframe.
HDFC Bank Ltd., India’s largest non-state lender by market value, fell 5.2 percent to 459.3 rupees as of 1:09 p.m. in Mumbai after the statement. Axis Bank Ltd. dropped 4.2 percent to 1,119.5 rupees. The Bankex index, which tracks 14 lenders, is heading for its biggest decline in more than two weeks.
The savings bank deposit rate, held at 3.5 percent since March 2003, was raised to 4 percent in May. Savings bank deposits climbed 20 percent annually on average from 2005 to 2010, with households accounting for 84 percent as of 2009, according to the central bank’s discussion paper in April.
“It was perhaps an important piece of reform to let the markets determine the price,” said Parekh. With bank savings steadily rising, “from a timing point of view it couldn’t have been better,” he said by phone today.
--Editors: Chitra Somayaji, Russell Ward
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To contact the editor responsible for this story: Chitra Somayaji at firstname.lastname@example.org