These banks are offering interests as high as 7.25% on savings accounts
The Indian account holders are the current king of banking an industry least likely tofavour individuals when borrowing isn’t cheap and savings rates trail headline inflation. Butcompetition has made new banks generous with deposit rates, although the longevity ofthese offerings is in doubt.
New payment banks (PBs) and small finance banks (SFBs) are offering savings interest rates as high as 7.25%, more than 300 basis points higher than what universal banks usually offer 4%. While such freebies may help acquire customers, will the trend last?
Industry experts liken the initial offers to appetizers, saying rates will fall as the market evolves. “Savings accounts are meant for transactions, and our belief is that people are not rate sensitive regarding such accounts: Attractive offers can give a temporary bump, but will not be economically viable for the entity in the long run,” said Samit Ghosh, chief executive officer, Ujjivan Small Finance Bank.
Most experts say the retail focus of the payments business meant that customer acquisition for these banks was bound to be as expensive as it is for the e-commerce business.The bigger question here is if customers can be made to stick around once teaser rates are withdrawn.
“Our experience in financial inclusion shows that such attractive offers are very difficult to withdraw: Once withdrawn, people start questioning the business model and there could be loss in trust,” said Rishi Gupta, managing director, Fino Paytech, which was recently awarded a payments bank licence.
While SFBs can make money from their lending business, PBs are restricted on that front as well.As per the Reserve Bank of India (RBI)norms, PBs are expected to keep 75% of the demand deposit balance with government treasuries and maintain not more than 25% of their demand deposits with other commercial banks.Such restrictions hinder their earning capabilities as well since government securities are currently yielding only about 6.8%.
“These entities will have to carry the burden of the interest rate differential, eventually creating stress on their balance sheet and profit and loss numbers,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, a Mumbai based consulting entity . “Their profitability depends on their ability to take banking to the hinterlands where banks have not reached at all.”
Such efforts require heavy investment in technology , which will be the sole basis of taking banking to the masses. PBs could have utilised their lower risk weightage to attract cheap capital for such technology investments, instead of burning to acquire customers, he says.”PBs could have been glorified wallets and offered small interest on the balance and that would have been a more attractive proposition than keeping money in a wallet,” said Parekh.
Payments banks can become an attractive banking option through features such as door step delivery of financial products, trust worthy bankers, no minimum balance requirements, and easy transaction options.”Our target is the mass market and we believe common people are not rate sensitive, they will want proximity to home, convenience, latest payments technology from payments banks,” said Gupta of Fino.”Anyway , we can take deposits up to Rs 1 lakh, a slightly higher interest rate will not make a huge difference for the consumers.”
While the regulatory stand on freebies in the telecom sector remains very strict, the RBI might not interfere with the interest rates offered by various banks as it has withdrawn dictating the rates.Experts believe that as long as there is no stress on their capital position and there are no consumer grievances reported, these entities will be allowed to decide rates as per their strategies.
“PBs have a difficult scenario as they are fighting for the same market share with universal banks along with SFBs, and their business model is tougher. Hence, they will eventually have to come down to at least neutral from the spread point of view,” said Bhavik Hathi,managing director at consultant fir m Alvarez&Marsal