With the RBI freeing interest rate on savings deposits, mid-size private lender Kotak Mahindra Bank today said it will offer 6% interest on savings deposits above Rs 1 lakh and 5.5% on those below Rs one lakh from November 1.
The eight-year-old city-based lender with just 323 branches has also increased its base rate, or the minimum lending rate below which it cannot lend, by 25 basis points to 10%.
Kotak Bank becomes the second lender after another city-based mid-size bank Yes Bank announced six% interest on savings deposits immediately after the Reserve Bank freed interest rates on savings accounts on October 25.
"We have increased the interest rate on savings account deposit to 6% for deposits above Rs 1 lakh, and to 5.5% to those below Rs 1 lakh as against 4% now. The new rates will be effective November 1," executive vice-chairman and managing director Uday Kotak told reporters here.
Terming the RBI move to free the last regulated interest rate as "a revolutionary and path-breaking decision", Kotak said, "Our asset liability committee met this afternoon and felt that we have to offer higher rates on savings accounts."
Kotak further said, "It has nothing to do with competition but it is just giving a fair deal to our customers. The RBI decision is the beginning of significant improvements in benefits for customers."
To a specific query on whether service charges will also go up along with the hike in interest rates, Kotak said, "There will be no changes in the product offerings or the prevailing charges at our bank. This is a standalone decision and is in public interest."
About the incremental cost that the bank would incur following the rate hike, its consumer banking president KVS Maniyan said, "We expect 10 to 12 bps spike in our cost of funds due to this decision. However, we are confident that it will not impact our net interest margin (NIM), as we will be making savings by better operational efficiency."
Kotak Bank's savings account size is just under Rs 32,000 crore as of end Q2, which is about 6% of its balance sheet and under 10% of its total deposit base, Maniayan said.
On the base rate increase, Kotak said "The bank revised its base rate upwards by 25 basis points from 9.75% per annum to 10% in line with the hike announced by the regulator last week and the new rate will be effective November 1. Accordingly, the old BPLR loans will also be costly by a similar amount."
After the RBI deregulated the savings rates last week, only Yes Bank and Kotak Bank have increased their SB rates but so far no major bank has bitten the bullet.
Over the weekend, the chairman of SBI Pratip Chaudhuri had admitted that the industry would need to offer more to savings customers and expected 125-175 bps increase in the savings rates shortly.
Savings bank rate was the last of the regulated rates in the domestic banking industry. It was raised by 50 bps in May to four% after being unchanged for 8 long years. Against this, term deposit rates are as high as 8-10 percent.
While RBI for long has been keen on freeing it, the industry body IBA was opposing it saying any such move would push up the costs of banking services like ATMs charges, money transfers and cheque books to protect margins.
The second largest private lender HDFC Bank head Aditya Puri was categorical in stating that "whether banks increased the SB rates or not, the cost of banking services would definitely go up following the RBI move".
The RBI move is not good news for larger banks with high savings account balances like SBI, HDFC Bank, ICICI Bank, PNB and Axis Bank or any other state-run banks, Deutsch Bank said in a note.