A Reserve Bank of India discussion paper has come out in favour of deregulating the interest rate on savings deposit, the only deposit interest rate that is still administered by the RBI; it has remained unchanged at 3.5 per cent since March 2003. Every other kind of deposit stands deregulated, the process, which started in the early 1990s, having been largely completed by October 1997. Now, banks have the freedom to set the interest rates on those deposits and loans. Deregulation has spurred competition in the financial sector, imparted greater efficiency in resources allocation, and strengthened the transmission mechanism of monetary policy. If the SB rate has not been deregulated so far, it is because of a belief that the regulator would take better care of the interests of these depositors, who are mostly from low income households in rural and semi-urban areas. This argument has lost its edge today because a wide range of investment and deposit options have been made available for all types of customers. In fact, if banks are allowed to fix their own rates on SB deposits, they might choose to reward all their depositors with higher rates. Innovation will also get a boost in a decontrolled environment. All these are extremely relevant in the context of the current policy thrust towards financial inclusion.
The other major argument against freeing the SB interest rate comes from the banks. Savings bank deposits constitute more than a fifth of the total deposits and more than 84 per cent of them are from households. Although these accounts are used for transactions, empirical evidence suggests that a significant proportion remains as savings. Over time, many public sector banks have come to depend on the stable core of savings deposits to bridge the asset-liability mismatch in their balance sheets. In a decontrolled scenario, this cannot be taken for granted as it would be unrealistic to expect SB depositors to stay on if their bank does not match the interest rate or the quality of service offered by others. Yet the view that there will be unhealthy competition among banks leading to a reckless bidding for savings deposits is not valid. After all, term deposit interest rates have been freed for a while now and, barring isolated instances, the deposit rates tend to converge within a narrow range. Considering the generally high rates of inflation, the SB interest rate has yielded negative real returns over a fairly long period. For the common man, the SB deposit account is the first, and often the only, point of contact with the banking system. It is time that a major disincentive in the form of low, administered deposit rate is removed.
Keywords: RBI policy, interest rate, savings deposit
India is a country of common people and it is rightly mentioned that most of the people has only single bank account which they use it for normal transactions and accumulating money for emergency.In turn losing a great deal of money via low rate of interest. Moreover RBI holds the regulations of SB, for the sake of unprivileged people, but from more than two decades they have not shown any correction in the rate of interest, which leads to a conclusion that RBI is not serving its purpose. Inflation is growing like demon in the country, and money deposited in the banking is losing its shimmer. The optimal solution to beat this is to deregulate SB rate handle from the patrons and let others market players play their games to improve the financial crisis.
I also agree that the Savings bank interest rate should be deregulated so that it will be beneficial for the customers especially the common households as they can earn more interest compared to this fixed rate of 3.5%.Also,it will in a way motivate people to save money as much as they can and will help them cut down unnecessary expenses.For people who can't understand the jargon of different banking products,this will be the best way to save their money.
A very healthy policy reform by the RBI.As rightly mentioned ,although savings acounts are used for frequent transactions,they hold a good chunk of the depositers money.Even i was irked at times by the paltry interest rate on savings account.But now this welcome move will indeed inspire competition among banks that will look to rope in more customers by offering exciting interest rates on their saving accounts.
The Govt of India must announce restoration of (enhancement) interest rate for Public Provident Fund (PPF) A/c, General Provident Fund Accounts on par with EPF A/c viz. 9.5% p.a. or atleast 9% immediately considering the general high rates of inflation as mentioned in your editorial and also erosion in money value. The investors of GPF/PPF A/cs request our Finance Minister to restore interest rates to these Accounts on par with EPF A/c immediately.
Deregulation of savings interest is rate important but equally important is better customer service. If the bank staff errs and income tax is deducted at source despite submission of the required form by the customer, and if the customer does not point out that such an error has happened, the only remedy available to the customer is to seek refund of tax. This is just one example of poor service. Mistakes in interest calculation is another type of mistakes. Senior citizens must be considered as a special category of customers and considerable efforts must be made to give them better service.
SB deposits account for roughly a quarter of total deposits of scheduled commercial banks that is significant and this is one important reason why banks are able to keep low the cost of procuring funds. Banks have obviously gained and hence their concerns are understandable that the deregulation of SB deposit interest rate would trigger intense competition among them and jack up the interest rates eventually to push the interest expenses up. From the customers's perspective there is a belief that is gaining ground that they are not getting a fair deal for their money put into banks. Taking into account the prevailing level of inflation the real interest rate translates into negative for the customers. Today, the customers use saving accounts not merely to park their funds temporarily and meet short term expenses for various purposes but also as a deposit account to meet their unforeseen contingencies in the medium term and earn moderate interest that gives banks the added advantage of using these low cost funds for funding partially their credit growth. Ever since the time the financial sector reforms were put into motion in early nineties, the deregulation has become a mantra for greater efficiency, transparency and profits. The banking industry has during the last decade and half witnessed deregulations with respect to few sensitive areas. They are intended to promote a healthy climate of overall growth and banks have always responded well to the policy changes though with certain degree of discomforts in terms of operational constraints at times. The revision in the interest rate on SB is long overdue. It is most welcome that RBI has made public the discussion papers on the subject to invite opinion from various quarters. It is clear that RBI is keen to hold a balanced approach to the issue and consistently building up a case for deregulation of SB interest rate also because of the past encouraging experience, internationally. It is perfectly justified in saying that deregulation will foster competition among banks enabling product innovations. Today, banks are paying 3.5% and the effective cost of Savings deposits is more by say 1 to 1.5% in terms of free services offered like issue of pass books, cheque books, ATM cards etc. Deregulation of SB interest would push the interest rates up adding more to the cost but what is expected from banks is that they absorb maximum technology and have superior platform and come out with technology driven innovative products that would reduce their transaction costs. By that they would be able to offer more interest to customers without considerably affecting their margins creating thereby a win-win situation.
The SB interest rates should be VARIABLE and always 1% above the inflation rate.Otherwise as Keyenes said,the Government WILL/IS, stealing the wealth of the Citizens by keeping the inflation rate high.
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