The RBI discussion paper said that savers would benefit from deregulation as rates are likely to rise.
MUMBAI: The Reserve Bank of India (RBI) has finally set the ball rolling on the issue of deregulating interest on savings accounts —- a move which large banks like SBI and HDFC Bank fiercely oppose and lenders like Yes Bank look forward to.
Deregulation would essentially give banks the freedom to set interest rates on savings accounts, which is currently fixed at 3.5%. Theoretically, a consumer could get a higher interest rate on a savings account due to the move, but it all depends on the RBI's final decision.
On Thursday, the central bank floated a discussion paper highlighting the pros and cons of deregulation, seeking public opinion on whether rates should be freed. The central bank has also pointed out that real interest rates — interest rates adjusted for inflation — have been largely negative for savings account holders. It said that savers would benefit from deregulation as rates are likely to rise. It has also said that freeing of interest rates would improve transmission of monetary policy by pushing up interest rates on savings accounts whenever the central bank raised policy rates.
In the past Aditya Puri, MD, HDFC Bank, and Shikha Sharrma, MD, Axis Bank, had said that savings rate should not be deregulated when there is a liquidity shortage and interest rates are rising. Former SBI chairman O P Bhatt had also said that deregulation would not benefit small depositors as banks that offer high interest rates would also seek a higher minimum balance to make up for transaction costs. Similarly, former RBI governor Y V Reddy was strongly opposed to savings rate deregulation stating that common people don't have time to apply their mind and shift money from one account to another and was strongly in favour of a uniform savings rate.
However, the extent to which deregulation will benefit small depositors is not yet clear. So far banks have been offering around the same return on 7- to 15-day term deposits which they pay on savings deposits (3.5%). But bankers say that this cannot be an indication. Although interest on savings deposits is calculated on a daily basis, savings accounts tend to be more 'sticky' than term deposits as savings accounts form the core of the retail customer's relationship with the bank.
Following the recent liquidity crunch many banks have realized the importance of having a higher share of current and savings account deposits (which are termed CASA deposits by the industry). Banks such as Yes Bank and IDBI Bank have been making all-out efforts to raise their share of CASA deposits and are seen as most likely to offer higher rates following deregulation.
"The effect on competition is still nebulous. It may be noted that movement of savings deposits and associated schemes amongst banks is constrained by inertia on the part of savers and barriers in the system in terms of minimum lock-in periods, penal interest rate, etc," said Madan Sabnavis, chief economist, Care Ratings. While banks would be induced to raise interest rates to mobilize savings deposits, funds may not flow freely as there would always be scepticism about changes in the interest rates structure unlike term deposits where the rates are fixed for a tenure, he added.
The questions asked by the RBI include: Should savings deposit interest rate be deregulated at this point of time? Should it be deregulated completely or in a phased manner, subject to a minimum floor for some time? How can the concerns with regard to savers (senior citizens, pensioners, small savers, particularly in rural and semi-urban areas) be addressed in case savings deposit interest rate is deregulated? How serious are concerns relating to a possible intense competition amongst banks and asset-liability mismatches if savings deposit interest rate is deregulated? Should higher interest rate be paid on savings deposits without a cheque book facility?
Bankers point out that even in the current environment savers have alternatives to savings deposits such as sweep-in accounts (where funds are transferred to FDs on a daily basis). There are also liquid funds where investors can park funds for a couple of days. Considering that the per capita savings deposit is around Rs 7,767, a one percentage point increase would add only Rs 6 per month on an average.
Deregulation would essentially give banks the freedom to set interest rates on savings accounts, which is currently fixed at 3.5%. Theoretically, a consumer could get a higher interest rate on a savings account due to the move, but it all depends on the RBI's final decision.
On Thursday, the central bank floated a discussion paper highlighting the pros and cons of deregulation, seeking public opinion on whether rates should be freed. The central bank has also pointed out that real interest rates — interest rates adjusted for inflation — have been largely negative for savings account holders. It said that savers would benefit from deregulation as rates are likely to rise. It has also said that freeing of interest rates would improve transmission of monetary policy by pushing up interest rates on savings accounts whenever the central bank raised policy rates.
In the past Aditya Puri, MD, HDFC Bank, and Shikha Sharrma, MD, Axis Bank, had said that savings rate should not be deregulated when there is a liquidity shortage and interest rates are rising. Former SBI chairman O P Bhatt had also said that deregulation would not benefit small depositors as banks that offer high interest rates would also seek a higher minimum balance to make up for transaction costs. Similarly, former RBI governor Y V Reddy was strongly opposed to savings rate deregulation stating that common people don't have time to apply their mind and shift money from one account to another and was strongly in favour of a uniform savings rate.
However, the extent to which deregulation will benefit small depositors is not yet clear. So far banks have been offering around the same return on 7- to 15-day term deposits which they pay on savings deposits (3.5%). But bankers say that this cannot be an indication. Although interest on savings deposits is calculated on a daily basis, savings accounts tend to be more 'sticky' than term deposits as savings accounts form the core of the retail customer's relationship with the bank.
Following the recent liquidity crunch many banks have realized the importance of having a higher share of current and savings account deposits (which are termed CASA deposits by the industry). Banks such as Yes Bank and IDBI Bank have been making all-out efforts to raise their share of CASA deposits and are seen as most likely to offer higher rates following deregulation.
"The effect on competition is still nebulous. It may be noted that movement of savings deposits and associated schemes amongst banks is constrained by inertia on the part of savers and barriers in the system in terms of minimum lock-in periods, penal interest rate, etc," said Madan Sabnavis, chief economist, Care Ratings. While banks would be induced to raise interest rates to mobilize savings deposits, funds may not flow freely as there would always be scepticism about changes in the interest rates structure unlike term deposits where the rates are fixed for a tenure, he added.
The questions asked by the RBI include: Should savings deposit interest rate be deregulated at this point of time? Should it be deregulated completely or in a phased manner, subject to a minimum floor for some time? How can the concerns with regard to savers (senior citizens, pensioners, small savers, particularly in rural and semi-urban areas) be addressed in case savings deposit interest rate is deregulated? How serious are concerns relating to a possible intense competition amongst banks and asset-liability mismatches if savings deposit interest rate is deregulated? Should higher interest rate be paid on savings deposits without a cheque book facility?
Bankers point out that even in the current environment savers have alternatives to savings deposits such as sweep-in accounts (where funds are transferred to FDs on a daily basis). There are also liquid funds where investors can park funds for a couple of days. Considering that the per capita savings deposit is around Rs 7,767, a one percentage point increase would add only Rs 6 per month on an average.
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