Reduce incentives on small savings: Rangarajan

State governments must reduce the incentives they offer on small savings, as interest rates are higher for small savings compared to deposits of bank," said C Rangarajan, chairman, Economic Advisory Council to the Prime Minister, in his inaugural address on the 19th Triennial conference of Indian Overseas Bank Officers' Association.

There has been a slowdown in the growth of deposits, as a slowdown has been witnessed in household savings in financial assets. In 2004-05 aggregate deposits of scheduled commercial banks increased by 12.8 per cent.

In this scenario, some attention has to be paid to the rate of interest offered on deposits as there are competing instruments like small savings offering higher rate, he added.

Rangarajan said that two key points that banks will have to work on will be to improve the customer services and effectively discharge credit to emerging segments of the economy.

Talking on the 'Indian Banking: Emerging Trends,' Rangarajan said that with Indian economy increasingly getting integrated with the rest of the world, the demands of the corporate sector for banking services will change not only in size but also in composition and quality.

Apart from production credit, financing capital requirements from the cheapest sources will become necessary. Provision of credit in foreign currency will require in turn a management of foreign exchange risk. Thus, the provision of a whole gamut of services related to integration with the rest of the world will be a challenge.

The foreign banks have access to much larger resources and have presence in many parts of the world. Therefore, Indian banks will have to evolve appropriate strategies in enabling Indian firms to accessing funds at competitive rates, he added.

Rangarajan pointed out that while banks have achieved a higher growth in provision of credit to agriculture and allied activities last year, this momentum has been carried further. It is only with respect to provision of credit to small and marginal farmers, special attention is required.