Savings rate deregulation, if implemented, is likely to lead to high volatility in returns.
There is a lot of buzz around Reserve Bank of India’s (RBI) thought process on deregulation of savings account interest rate. How will a deregulation of savings account interest rate affect you.
A savings account currently fetches a depositor an interest rate of 3.5 per cent as specified by RBI. Banks, therefore cannot decide the interest rate on savings accounts on their own like they do in case of fixed deposits (FDs) and other products. That’s why, while investing in FDs, you can choose between banks that offer you a better rate.
Soon, you might be choosing between banks before opening a savings bank account too. The regulator is planning to let banks decide the interest they would like to pay on savings account too.
Savings accounts have been on the regulator’s radar for some time now. Effective, April 1, 2010, the regulator changed norms for savings account interest calculation. The earlier practice of calculating interest between the tenth and the last day of the month was changed to interest payable on the ‘balance on a daily basis’.
STEPPING STONES
Deregulation of the savings account interest rate will result in a big change in the retail banking sphere. Of course, there are several issues RBI need to look before introducing the move.
- Savings bank accounts provide low cost funds to banks and this helps in lowering the overall cost of funds for lending. At the same time it is also expensive to service a savings bank account and hence most private banks prescribe a minimum average balance whereas the foreign banks mostly discourage retail investors. Hence the key is to create guidelines on how to provide savings bank accounts offering competitive rates while making it cost effective to service retail accounts as well.
- The next key issue is that some clients could be given preference over others and hence this could lead to different rates being offered to different clients, which is currently the case with fixed deposits. Considering the nature of the account , RBI would be looking to ensure that there is no discrimination in interest rates among different clients of the same bank.
- According to a central banker's presentation, only 54 out of 100 Indians had a bank account. Today there are around 200 million people who have mobile phones but do not have a bank account. This shows the low penetration of the banking system in India. Hence one of the key points is whether deregulation can really help increase the reach of the banking system and can get more people to participate in the banking system.
IMPACT ON YOUR EARNINGS
This might mean good news for depositors. The direct impact of deregulation would be competitive savings bank rates offered to the depositors. The rates could go up but do not expect drastic upgrades.
| Tenure | Interest rate (%)* | Interest rates %)** |
| 15-45 days | 2.5 | 4 |
| 46-90 days | 3.5 | 4 |
| * rates as on 09/11/2009 ** rates as on 17/08/2010 | ||
Find below SBI’s interest rate table for deposits below Rs 1 crore.
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Before August 17, 2010, the interest rates for FDs with a tenure of 15-45 days just paid 2.5 per cent, much lower than a savings bank interest rate. It is now up to 4 per cent. Similarly, interest rates of a 46-90 day FD were 3.5 per cent whereas it is now 4 per cent. Even after deregulation, interest rates on savings accounts are likely to go up but not drastically. On the other hand, it is likely that in a low interest environment the rates could also go down if there is no base minimum rate that needs to be paid. Essentially rates will be based on the liquidity situation in the market.
For banks ,the best way to raise funds is to generally through Casa(current account savings account) as compared to FDs. As a bank’s Casa goes up, it’s overall cost of funds goes down. Hence when deregulation happens, an important implication would be that a bank which has a lower Casa will lure account holders from banks with a higer Casa simply because of their attractive rates.
DEREGULATION TIMEFRAME
Like most regulations, deregulation of savings bank accounts is unlikely to come into effect soon. RBI plans to set up a committee to mull, discuss , debate the issues and to draw up appropriate guidelines. In the past, we have seen several major regulatory changes miss their deadlines. This makes it difficult to say, when savings bank account deregulation will see the light of the day. Your guess is as good as mine.
The writer is a certified financial planner