Thursday, April 7, 2011

De-regulate interest rates on savings bank deposits

In a move reminiscent of the Bombay Club of industrialists who opposed the opening up of the economy in the early 1990s, bankers have almost unanimously opposed de-regulation of interest rates on savings bank deposits. They are, doubtless, wary of introducing yet an added element of uncertainty.

However, administered interest rates are an anachronism when interest rates are essentially market-determined . There can be no justification for continuing with regulated interest rates whether on saving bank deposits or small savings like provident funds and national savings certificates. Despite this, successive governments and governors of the Reserve Bank of India have hesitated to pull the plug.

More than eight years ago, the RBI had raised the issue in its April 2002 monetary policy statement. Only to defer the move! In its April 2006 policy, the central bank returned to the subject but once again opted to maintain the status quo; though it accepted that 'in principle, deregulation of interest rates is essential for product innovation and price discovery in the long run' .

The need to reward savers (high household savings have been the prime driver of investment) and provide them with some stability in an environment where they have no social security is only part of the reason for the desire to maintain status quo.

The main reason is the higher cost of funds that de-regulation is bound to bring in its wake. Savings bank deposits provide banks with a stable deposit base. Hence the mad scramble among banks for CASA or current and savings accounts. Once rates are de-regulated , it is quite possible competition will drive interest rates up; especially in a situation where there is a huge unsatiated demand for funds.

Public sector banks , that have traditionally had a larger share of savings bank accounts thanks to their wider branch network, would be particularly hard hit. But to the extent deregulation will give individual banks flexibility to decide on savings bank interest rates even as greater competition could result in newer customised products being introduced , it is a goal we must work towards.
Source : ET

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