Smaller banks raise interest bar on savings accounts

financialexpress.com:

In a race to win new customers, small and mid-size banks are willing to pay a higher price. Small and mid size banks are offering upto 7.5% interest on savings accounts, breaking away from the age-old banking practice of using Current Account-Savings Accounts (CASA) as a source of low-cost funds.

With competition between the banks getting fierce, the line between savings accounts and fixed deposits has blurred over the past few months. Interest on savings accounts of smaller banks are now between 3-7.5%, which is not far from 3- 8% offered by some big banks on their fixed deposits.

Bankers say paying higher cost to mobilise retail deposits helps them in growing their business fast.

“Banks which are paying 3.5 and 4% interest on savings accounts have been in the business for many decades while we are late entrants and are just six years old. In order to increase deposits, we have to attract new customers by offering higher rates on savings accounts,” the spokesperson of Ujjivan Small Finance Bank told FE. “We do not mind paying slightly higher cost of funds in the short run because we want to build up our CASA deposits in shorter duration,” he added.

Higher borrower cost does not pinch these aggressive banks because they recover their cost by pricing their loans higher than big banks. Usually these banks target customers who need smaller amounts and are not targeted by big private banks.

Acquiring new customers is also lucrative business proposition for smaller banks. “Unlike well-established public and private lenders, neither we have huge branch network nor a large base of customers. We are willing to attract new customers at a higher cost because new customers bring new opportunities,” the consumer banking head of a