Savers pay for demonetisation

Indian savers have always been a protected lot. Saver-friendly government sponsored schemes, and the guaranteed 4% savings deposit rate had ensured that even accidental savers continue to get a reasonable return.

But demonetisation changed this balance as banks found themselves staring at a huge incremental interest payment on a deluge of deposits in just a short span of time. Also, when these deposits began to move out (60% outflow in the case of SBI), the math on lending rates turned dicey.

Given marginal cost of funding based lending rate (MCLR) regime, SBI had no choice but to bring down its saving rate or else hike its MCLR. Many other banks are likely to follow this cut.

Another fact is that SBI reduced its savings rate and not fixed deposit rates to bring down its cost possibly because it saw no incremental benefit in the latter.

Nevertheless, fixed deposit rates have already dropped nearly 150 percentage points since the easing cycle began in 2015. To be sure, savings account deposits are more operational than investment oriented. To that extent, arguing on the loss of 50 bps of interest earnings would be banal.

However, the rising average savings deposit size is enough to show that savings account holders are becoming accidental savers as they keep more money in them.

And this is where we come to another side of this story besides the obvious demonetisation one.

Bank margins were getting compressed not just by a chunky rise in interest outgo on deposits but also because of rising credit costs. A valid counterfactual argument is that perhaps SBI would have spared its savings rate had it not seen a 100 bps rise in its credit costs over the past two years owing to bad loans. The accompanying chart shows what the top five lenders representing more than a quarter of total credit faced on credit costs. Baring HDFC Bank, all big lenders reported a surge in credit costs and the outlook on credit costs by these lenders is also not sanguine as ageing bad loans would keep them at the current levels if not elevated for the better part of 2017-18.

Hence, the continuous cut in deposit rates that concluded with SBI finally pruning the stickiest savings rate as well. In a nutshell, savers eventually ended up paying for adventurous borrowers.

So will savers lose more in the coming months? It is clear that unless errant Indian companies begin repaying their dues and other borrowers begin borrowing with zest, banks would be forced to bring down deposit rates further. The Reserve Bank of India has already increased the pressure on banks to cut lending rates and this would be preceded by deposit rate cuts. A quick resolution to bad loans is not just in the interest of borrowers but also of savers.