Independent Research and Policy Advocacy

Deregulation of savings bank interest rates: A welcome move

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Following the release of a discussion paper on deregulation of savings bank deposit interest rates, the Reserve Bank of India (RBI) has in its second quarterly review of Monetary Policy 2011-12, deregulated savings bank deposit rates with immediate effect. Given the low penetration of savings bank accounts in India (only 36 bank accounts for every 100 persons as on March 2009[1]), we are very excited by this significant step. In the short run, this is expected to increase returns to consumers on their savings accounts by triggering competition between banks, in a manner that may be similar to what was observed for deregulation of domestic term deposit interest rates. In the long run, bringing down the ‘negative real returns’ characteristic will make bank accounts a more attractive savings instrument.

We look forward to the operational guidelines for this deregulation move. We hope that these guidelines will take into consideration consumer protection measures to safeguard the interests of about half of all Indian households that save, invest and diversify into various physical assets in the absence of access to suitable financial assets. Our responses to RBI’s discussion paper on the same can be found here.

[1] Basic Statistical Returns of Scheduled Commercial Banks in India and Handbook of Statistics on the Indian Economy, RBI, Various Issues

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5 Responses

    1. Thanks for your comment Mr. Nayak. Exciting to see some banks moving so fast to change rates. Let’s see what the bigger private banks and PSBs do

  1. Hi

    Saving rate deregulation will impact the margins of the bank by 15-20bps if there is 100bps increase in the rates. If SBI does not increase the rates, no big PSU and private players are going to alter their rates.

    Banks like Yes which have 1% SA of its overall deposits are bound to change their interest rates for great share of SA deposit base. But again these are too small players that to in urban areas to change the equation.

    Moreover, if at all major players increase the savings rate, there would be corresponding increase in the transaction fees like cheque book facility, ATM withdrawals, pass book facilities, net banking related fees uncless RBI comes out with another guideline restricting these charges. 

    There could be short term hiccups due to smaller private giving 5.5/6% rates but in the long run  its a zero sum game and wont benefit consumers at a large extent. 

  2. Though it sounds exciting, but I
    don’t think interest rate is a critical factor when you decide about a bank for
    a saving account. With the level of competition in current market, I think it’s
    the “quality of service” which influences the decision of choosing a bank.

    When we talk about financial inclusion, I wonder
    how this variation of 1-2% will attract anyone who is still laminated from this
    industry. Rather I feel it could bring trouble for smaller players of the industry
    who have already hiked their rate as this “Costly fund” will force them to increase
    their risk appetite.Sorry for being on a negative note, but this is what I feel.


    1. Dear Jayanta Kumar, thanks for your helpful comment. You are absolutely right that there are many other parameters other than interest rate which will determine whether someone opens an SB account or switches accounts across providers. That said, we still think deregulation of interest rates on deposit accounts is a big move. For the customer, it takes us closer to providing a savings avenue that tracks inflation (similar to money market funds). For banks, by eliminating this artificial wedge between deposit yields and risk-free yields, it forces them over a period of time to work harder to identify profitable strategies. The demand for deposits as a source of funds for banks is not going to disapper and will get higher with more banks and competition; so they cant afford to ignore these untapped markets.

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