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RBI to issue discussion paper on savings rate deregulation soon

RBI to issue discussion paper on savings rate deregulation soon
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First Published: Thu, Feb 24 2011. 10 04 PM IST

Policy matters: Reserve Bank of India governor D. Subbarao.Photo Indranil Bhoumik/Mint
Policy matters: Reserve Bank of India governor D. Subbarao.Photo Indranil Bhoumik/Mint
Updated: Thu, Feb 24 2011. 10 04 PM IST
Millions of savings account holders may soon get higher returns on their deposits. The Reserve Bank of India, or RBI, is set to take the first steps that could lead to the deregulation of the interest rate on savings accounts, the only remaining major rate that’s not administered.
“There is a view that we should deregulate the interest rate on savings bank accounts too,” RBI governor D. Subbarao said, speaking at the convocation of Sambalpur University on Thursday. “We are examining the pros and cons of doing that and will shortly put out a discussion paper for eliciting feedback.”
Policy matters: Reserve Bank of India governor D. Subbarao.Photo Indranil Bhoumik/Mint
Traditionally, the central bank invites comments from various stakeholders on key issues by posting a discussion paper, followed by guidelines in due course.
A savings account is a hybrid of a current account and a term deposit that offers easy liquidity and cheque-writing facilities. Apart from the savings rate, interest rates on deposits of non-resident Indians (NRI) are also currently administered.
While the rate is currently fixed at 3.5%, the actual rate of interest that customers received on savings deposits was less than that till April last year. Banks used to pay interest on the average funds kept in an account between the 10th and the last day of a month.
Since then, banks have been calculating the rate of interest on a daily basis, increasing the effective return to consumers.
In September, then RBI deputy governor Usha Thorat had said that the apex bank had set up a working group to study the deregulation of the savings rate.
Thorat had, however, cautioned banks that freeing up savings rates should not lead to disparities.
“It would need to be ensured that there is no discrimination between different customers of the same bank,” Thorat had said.
Customers may benefit from the freeing up of savings rates as banks could then compete for customers, but this could, in turn, jack up the cost of funds for banks.
Bhaskar Sen, chairman and managing director of Kolkata-based United Bank of India, said it was too early for banks to assess the impact that savings rate deregulation may have.
“We need to understand whether this (move) will be helpful to the (banking) system and what will be the impact on the cost of funds,” he said.
Analysts said such a move could squeeze margins in a rising interest-rate scenario on account of the possible divergence between long-term assets (government securities and loans) and deposits.
“There will be a large mismatch in terms of repricing of assets versus liabilities of banks,” said Vaibhav Agrawal, vice-president, research, at Mumbai-based Angel Broking Ltd.
“On the asset side, banks have G-secs (government securities) and long-term advances like infrastructure loans, which do not get repriced easily,” Agarwal said. “When the interest rates on such assets go up, there will be no support from fixed-rate liabilities like savings deposits once it is freed.”
dinesh.u@livemint.com
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First Published: Thu, Feb 24 2011. 10 04 PM IST