Banks may get to fix interest rate on savings a/c

MUMBAI: Guaranteed return on savings banks deposits may soon be a thing of the past. The Reserve Bank of India has moved a step forward in its proposal to deregulate this interest rate.

After mooting the idea, the central bank has now set up a working group to look into the modalities of deregulation, said RBI deputy governor Usha Thorat at a Ficci-IBA seminar in Mumbai on Wednesday. “An important consideration is whether deregulation of savings rates would draw more population into the fold of formal banking system,” she added.

Deregulation would mean that banks would have the freedom to set the interest rate on savings accounts based on their need for funds. At present, the rate of interest on savings deposits is mandated by RBI at 3.5%.

Since banks have put in place a system where interest rate is calculated on daily balances, a transition to deregulated interest rates on savings account does not have any technical challenges. Most banks are in a position to determine their liquidity requirement and price their savings deposits accordingly.

Former RBI deputy governor SS Tarapore has been a strong proponent of freeing interest rates on savings deposits. In a recent article in a business publication, Mr Tarapore had said: “The interests of small depositors have been, for all practical purposes, bartered away. With the Consumer Price Index (CPI) showing a year-on-year increase of 13-14% and the Wholesale Price Index (WPI) an increase of 10%, the interest rate on savings bank accounts of 3.5% reflects high negative rates of return. A rock-like savings bank deposit rate of 3.5%, irrespective of the overall situation, reflects policy paralysis.”

Bankers are unwilling to comment on whether the savings rate will rise or fall if interest rates are freed. Individually, most banks want to reduce the cost of savings deposits as these are operational accounts with several free services. But at the same time, there is a fear that an upstart may introduce high rates to increase marketshare, forcing others to follow suit.

Until last month, SBI was offering a mere 2.5% on term deposits up to 45 days which was one percentage point lower than the 3.5% on overnight savings deposits. Last month, the rate was revised to 4%.

“On one hand, savings accounts provide banks with low-cost funds of an enduring nature which facilitate asset-liability management and help lower lending rates. On the other hand, the costs not currently recovered in handling such accounts have to be considered as well,” Ms Thorat said, highlighting various issues that would have to be dwelt upon.

Totally freeing rates could, in situations where there is a virtual monopoly of banking, lead to lowering rates in some areas while leading to increase in other areas.

“It would need to be ensured that there is no discrimination between different customers of the same bank. Transparency in cost recovery could facilitate deregulation — this would also need to be non-discriminatory across locations,” she said. All these issues would be dealt with by the working group.