Commercial banks set interest rates on SB accounts in most countries
The Reserve Bank of India (RBI) on Thursday made a pitch for deregulation of savings bank deposit rates, saying that deregulation of interest rates on savings bank (SB) accounts would benefit savers, as it would enable lenders to come out with innovative products to attract more funds from low-income households.
While the RBI had deregulated interest rates on fixed deposit schemes in 1997, it continues to fix the rate on savings bank deposits. The interest rate on savings bank deposits has remained unchanged at 3.5 per cent since March 1, 2003.
As indicated in the second quarter review of Monetary Policy 2010-11 on November 2, 2010, the RBI released on its website a discussion paper on ‘Deregulation of savings bank deposit interest rate'.
“Savings deposit interest rate can not be regulated for all times to come when all other interest rates have already been deregulated as it creates distortions in the system,” the RBI noted.
International experience suggests that in most countries, interest rates on savings bank accounts are set by commercial banks based on market interest rates.
Most countries in Asia experimented with interest rate deregulation to support overall development and growth policies.
“These resulted in positive real interest rates, which in turn contributed to an increase in financial savings. Deregulation of savings bank deposit interest rate also led to product innovations.” The RBI said that deregulation of interest rates in India since the early 1990s has improved the competitive environment in the financial system, imparted greater efficiency in resource allocation and strengthened the transmission mechanism of monetary policy.
“The only interest rate that continues to be regulated now is the savings deposit interest rate.”
Savings deposit interest rate has not been deregulated for the reason that a large portion of such deposits are held by low-income households in rural and semi-urban areas.
Beneficial to savers
The empirical evidence suggests that unlike metropolitan areas, savings deposits in rural, semi-urban and urban areas are responsive to interest rate changes in savings deposits.
Therefore, the RBI argues that market-based interest rate may be beneficial to savers. Since savings deposit is a hybrid product, which combines the features of current account and term deposit, a market-based rate of interest on this product has the potential to attract large savings from low-income households.
“Deregulation will also allow banks to introduce product innovations which could also benefit the depositors. Deregulation will have another major advantage in that it will help improve the monetary transmission.
“Since savings deposits constitute a significant portion of aggregate deposits, regulation of interest rate on such deposits has impeded the transmission of monetary policy impulses,” the RBI stated.
In the light of pros and cons of deregulation of savings deposit interest rate as set out in the discussion paper, the RBI has also sought feedback from the general public by May 20 to the Adviser-in-Charge, Reserve Bank of India, Monetary Policy Department, Central Office, 24th floor, Central Office Building, Mumbai-400001.