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Will Corona crisis take a toll on savings account interest rates?

Amitava Chakrabarty
Coronavirus outbreak, Novel Coronavirus COVID-19, lockdown, Reserve Bank of India, RBI, RBI policy rates, repo rate, reverse repo rate, cash reserve ratio, CRR, fixed deposit, FD, interest rate on savings bank account, SBI, PNB, IBA

As the economy comes to almost standstill following the nationwide lockdown, in a bid to ensure that people don’t gather in their workplaces and avoid using public transport in order to maintain social distancing, so that the spread of Novel Coronavirus COVID-19 may be contained, the Reserve Bank of India (RBI) has announced a slew of measures to provide relief to the affected people.

The RBI has announced a 3-month moratorium on payment of EMIs on term loans, and has cut key policy rates, viz repo rate by 75 bps to 4.4 per cent, reverse repo rate by 90 bps to 4 per cent and Cash Reserve Ratio (CRR) by 100 bps to 3.0 per cent of net demand and time liabilities (NDTL).

While rate cuts would help borrowers as loans would become cheaper, depositors would suffer as, along with lending rates, deposits would also become less attractive.

As the reverse repo rate, at which the RBI takes loans from banks, has come down to 4 per cent, it would become difficult for banks to offer the same interest rate on savings bank account balances.

Moreover, with enhanced liquidity for the banks that are already flushed with funds, paying the same interest rate that they are getting on deposits with RBI would make little business sense.

So, will it be feasible for banks to offer the same interest rate of 4 per cent on deposits in savings bank accounts as that of reverse repo rate of 4 per cent?

"Most of the banks are already paying lower than this," Sunil Mehta, CEO & MD, PNB and CEO IBA (Indian Banks’ Association), told Financial Express Online.

SBI Chairman Rajnish Kumar said, "ALCO (Asset-Liability Committee, which ensures that a bank has enough assets to pay for its liabilities) will meet on 7th (April, 2020)."

So, with the leading bankers indicating that the decision on cutting interest rates on savings bank accounts would be taken in due course, brace for a lower rate of interest on the money you keep in banks.