End of Regulated Interest Rates Era

Recently, the Reserve Bank of India has completely deregulated the interest rates. The Interest on Savings Banks Account was the last administered pricing imposed by the banking regulator and now the savings bank account interest rates have been deregulated.

This will set a stage among the banks to attract more deposits by offering attractive interest rates to consumers.

What was the Current System?

Up till now, the SB account fetched account holders a measly 4%. The system was there in place since 1978. Yes Bank became the first bank to react to the RBI Mandate and it immediately increased the return on its SB accounts to 6%.

What are Implications (Important)?

• It is estimated that there are ` 13 lakh crore of funds parked in SB (savings bank) in India.
• The existing system since 1978, was causing the deposits receives negative real returns because the interest on these accounts has been fixed at 4% even as inflation was two-and-a-half times that level.
• The deregulation of the savings banks rates would give the customers an opportunity to shift to banks that come up with better deals.
• Up till now the rate of 4% on Saving Banks Account was being prescribed by RBI. Now
  Banks themselves decide the interest rates and are free to offer whatever returns they wish.
• Please note that banks can also withdraw the savings deposits without notice as per new regulations by RBI.
  
• The interest rates are to be calculated on daily basis, this is because part of these deposits is perpetual. Partly because amounts withdrawn are replenished by monthly earnings and partly because banks mandate a minimum balance ranging between Rs 5,000 to Rs 10,000 on savings account.
  
• The RBI has also tried its best so that the banks may not be able to discriminate between large and small depositors. RBI says that the same rate will be applicable to all depositors up to ` 1 lakh. However, for larger deposits banks can offer differential rates. At the same time, Reserve Bank of India has said two customers having the same amount should get the same rate.

How it will affect the banks?

An increase in SB rates will put pressure on bank margins. Banks will have to offer higher rates and then they also have to make up the extra costs. To do that they may revise charges in respect of accounts where they are losing money. But we know that RBI has already frozen charges on ATM usage. So, there is possibility that banks may hike branch service charges to compensate for the savings rate outgo.

Month: Current Affairs - December, 2011