Should Savings Bank Interest rates be Deregulated?

Kaul ManishKazim Abbas

R KrishnaswamyMahesh WarrierMhaske Deepti

Pai PritiYadav Rajesh Kumar

What is Deregulation?

• Removal or simplification of government rules and regulations .

• It is moving towards a more laissez-faire, free market.

• It is different from liberalization.

What is a Savings Account?

• Savings accounts are accounts maintained by individuals or financial institutions.

• A savings deposit is a hybrid product.• Savings accounts are maintained for both

transaction and savings purposes.• Provides convenience.

Features of a Savings Account

• Free withdrawals

• No ceiling

• No limit on the number of cheques.

• Minimum balance is stipulated.

History

• India pursued financial sector reforms in the early 1990s.

• Deregulation of interest rates was intended to strengthen the competitive forces.

• The issue was 1st taken up in the Annual policy statement of 2002-03.

• The interest rate on savings bank deposit has been progressively reduced.

• March’03-10 :- 3.5%

• May 10 :- 4%

Trends

Period Demand Deposits

Savings Bank Deposits

Term Deposits Aggregate Deposits

1 2 3 4 5

1981-1990 19.5 17.1 19.8 18.9

1991-2000 12.5 15.7 17.4 16.1

2001-2010 16.2 19.4 18.2 18.2

(a)2000-05 12.8 18.8 14.8 15.4

(b)2005-10 19.7 20.1 21.7 21.0

Guidelines

• A uniform interest rate on savings bank deposit upto Rs. 1 lakh.

• For savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest.

Pros of Deregulation

• Regulation of interest rates imparts rigidity

• Provide wider options to Depositors

• Differential interest rates leads to reduction in the share of savings bank deposits in total deposits.

• Will Improve Transmission of Monetary Policy

• May Lead to Product Innovations

• Good impact on rural and semi-urban depositors

Cons Of deregulation

• Possibility of an Unhealthy Competition

• Risk of Asset Liability Mismatches

• May Lead to Financial Exclusion

• Could Adversely Affect Small Savers/Pensioners

• Possibility of Introduction of Complex and not so Easily Understood Savings Products

• Transfer Of cost to the Customer

• Create the rich poor divide.

• A blow to the profitability of Banks.

• The timing is not right because of volatility of the market situation

International Experience:-

• Eg: Canada, Japan, Australia, New Zealand, UK, and USA

• Asian Countries:- Singapore(between 0.25 and 0.35 ), Philippines, Indonesia, Sri Lanka, Taiwan(0.31), Malaysia(between 0.40 and 0.70)

• Hong Kong- the most recent one (2001)

Expert’s View

• The deregulation of SB rates should have been accompanied with other essential reforms – like the reduction in the overall resource preemption levels, liberalisation of priority sector lending norms, deregulation of other administered rates like interest rates on crop loans or export credit and so on – for the creation of a fair, market-driven banking system.

-DR RUPA REGE NITSURE Chief Economist, Bank of Baroda

There are four reasons for banks to cheer.• The freedom to price around a quarter of available

funds gives them better control• Free pricing helps banks manage their costs more

efficiently.• Banks can increase or decrease this reservoir of

funds to the extent that is possible.• Asset-liability management becomes easier.

-MADAN SABNAVIS Chief Economist, CARE Ratings

Verdict????