As rates fall, Kotak Mahindra Bank sticks to 6% savings rate

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Mumbai: Kotak Mahindra Bank will forgo its margins and stick to its current savings rate of 6% to garner more savings deposits.

“We are dropping our lending rates in line with the banking industry, but on the deposit side, we are sticking our neck out and sticking to 6% for amounts at above Rs.1 lakh and 5% for up to Rs.1 lakh. It is a significant impact on margins,” managing director Uday Kotak said at a press meeting on Thursday.

The bank’s net interest margin was 4.3% as of 30 December and Kotak said it is unlikely to fall below 4% in spite of the higher interest rate offered on savings accounts.

Apart from Yes Bank, which gives a 7% rate on its savings account deposits, most commercial banks pay 4% on them. Kotak added that the bank will aim to increase its current account and savings account (CASA) ratio to 40% over the next 12-18 months from the current 35%.

Offering interest rates 200 basis points higher than its peers has helped Kotak Mahindra Bank to grow its savings account deposits by a compounded 40% over the last five years, he said.

A basis point is one-hundredth of a percentage point.

As bank deposit rates drop further after the latest deep cut by the government in the rates of small savings schemes, Kotak is hoping that customers will find a 6% interest rate on savings accounts appealing.

The government slashed interest rates on small savings schemes by as much as 130 basis points on 19 March, making bank deposits look more competitive. After the rates were pared, the one-year rate stands at 7.1%, while most banks’ one-year deposits offer a marginally higher 7.5%.

Kotak Mahindra Bank’s one-year term deposit rate is 7.75%. Kotak said that although the bank’s savings rate remains at 6%, the lender will not necessarily hold its term deposit rates.

The private lender will cushion its margins by pricing risks “better”, Kotak said, hinting that credit risk spreads for borrowers could be wider. “We also have to be competitive, because if you misprice risk, you will lose business,” he added.

Under the current marginal cost of funds based lending rate (MCLR) method, banks have to add a credit risk premium to the MCLR, which would be the final loan rate to the borrower.

The lender’s MCLR is among the highest in the one-year maturity at 9.60%. Most banks’ one-year MCLR is around 9.3%. Kotak said that lending rates will be competitive and not necessarily kept unchanged to protect margins.

The Reserve Bank of India introduced the MCLR as a way to prod banks to pass on the reduction in its policy rate.