Savings deposits to be unshackled

CREDIT POLICY RUN-UP

Bankers expect the Reserve Bank of India (RBI) to announce its intention of deregulating interest rate on savings deposits to enable banks to address the central bank's concerns over "financial exclusion".

A senior official with a public sector bank said, "Once the regulator abolishes the 3.5 per cent rate on savings deposits, banks can do away with various clauses such as maintenance of minimum balance for savings accounts. Banks normally ask their customers to maintain a minimum balance to cover for interest outgo and the costs of various transactions and meeting regulatory stipulations."

RBI had in its earlier monetary policy statement broached the issue of regulated interest rate on savings accounts, but stopped short of indicating its subsequent move.

Banks are required to pay 3.5 per cent interest on savings deposits. To make up for the interest outgo and meet expenditure on maintenance of accounts, banks stipulate quarterly average minimum balance ranging from Rs 1,000 to Rs 5,000.

The Indian Banks' Association (IBA) is working on a a technical paper for submission to the RBI. The central bank will act on the basis of the paper and initiate steps for deregulation.

Deregulation, said bankers, would help banks develop savings products for low-income groups and ensure the financial inclusion of the needy and poor. Also, banks can use price (interest rate) as an effective tool to build the deposit base after deregulation happens.

The RBI, in its recent branch authorisation policy, had listed underbanked and unbanked districts across India and indicated that applications for opening branches in those districts would be treated favourably.

Bankers said RBI now realises that the regulated savings account interest rate is a major stumbling block for banks to bring the urban poor into the banking fold and also to expand reach to underbanked/unbanked areas.

A senior official with a new generation private sector bank said, "The cost of servicing savings acco unts varies across banks. RBI needs to perform a balancing act when it comes to deregulating savings rate. If the existing regulation is done away with, it could lead to immense competition among players across the board."