Indian Banks Reduce Savings Account Interest Rates to Preserve Profitability

Strategic Insights -

As part of a broader effort to protect their profitability amidst a tough operating environment, India's biggest banks have recently reduced interest rates on savings accounts. HDFC Bank, ICICI Bank, Axis Bank, and Federal Bank have each trimmed their savings account interest rates by 25 basis points to 2.75% for balances below Rs 50 lakh, while SBI has been offering 2.7% on balances under Rs 10 crore since October 2022. These reductions come as the incremental CASA (Current Account Savings Account) ratio for the Indian banking system has declined sharply from a long-term average of 39% to just 22% over the past year. Analysts believe that these cuts are aimed at lowering the overall cost of funds and preserving margins.

Key Takeaways:

  • HDFC Bank, ICICI Bank, Axis Bank, and Federal Bank have reduced their savings account interest rates by 25 basis points to 2.75% for balances below Rs 50 lakh.
  • SBI has been offering 2.7% on balances under Rs 10 crore since October 2022.
  • The incremental CASA (Current Account Savings Account) ratio for the Indian banking system has declined from a long-term average of 39% to just 22% over the past year.
  • The reduction in savings account interest rates is aimed at lowering the overall cost of funds and preserving margins for banks.
  • Pranav Gundlapalle, head of India financials at Bernstein, expects more rate reductions and limited price competition among large banks.
  • The banking system closed with a loan growth of approximately 11% YoY and deposit growth just above 10% in FY25.

Statistics:

  • 25 basis points: reduction in interest rates on savings accounts for HDFC Bank, ICICI Bank, Axis Bank, and Federal Bank
  • Rs 50 lakh: the balance limit below which HDFC Bank, ICICI Bank, Axis Bank, and Federal Bank have reduced their savings account interest rates
  • 2.75%: the new interest rate on savings accounts for HDFC Bank, ICICI Bank, Axis Bank, and Federal Bank
  • 39%: the long-term average incremental CASA ratio for the Indian banking system
  • 22%: the current incremental CASA ratio for the Indian banking system
  • 11% YoY: loan growth for the banking system in FY25
  • 10%: deposit growth for the banking system in FY25

Sources:

  • "Mumbai: India's biggest banks are reducing interest rates on savings accounts as part of a broader effort to protect their profitability" by Saloni Shukla, BID
  • "HDFC Bank, ICICI Bank, Axis Bank and Federal Bank have each reduced their savings account interest rates by 25 basis points to 2.75% for balances below Rs 50 lakh"
  • "SBI has been offering 2.7% on balances under Rs 10 crore since October 2022"
  • "Analysts say the cuts are aimed at lowering the overall cost of funds, helping banks preserve margins in a tough operating environment" by Pranav Gundlapalle, head of India financials at Bernstein
  • "ôWe see this reduction as a secular trend and a lever for enhancing profitability,ô" by Pranav Gundlapalle, head of India financials at Bernstein
  • "ôA 25 basis point cut to the savings rate could improve return on assets (RoA) by about 5 basis points. While the move strengthens profitability, there are concerns that it could prolong the ongoing weakness in CASA growth."