It’s fairly certain now that the Reserve Bank of India (RBI) will soon deregulate the savings bank rate, the last relic of mandated rate regime in the Indian financial system. Just a few days after circulating a discussion paper on the pros and cons of savings bank deregulation and inviting comments from various quarters, the central bank raised the savings bank rate by half a percentage point in its annual monetary policy early May.
Its bias for freeing the savings rate is pretty evident from the discussion paper, and it’s a matter of time before it announces deregulation. Unlike the licensing norms for new banks and guidelines for local incorporation of foreign banks, on which RBI is going slow for various reasons, savings bank deregulation will not take much time as it has the tacit approval of the government. Bankers are not happy with the move, but accept this as fait accompli. They are curious though and want to know whether the banking regulator will free it at one go and take a gradual approach. If, indeed, RBI decides to free the savings bank rate in a phased manner, it will probably keep a floor for the rate in the first phase allowing banks to offer more if they wish so. Currently, banks are offering 4% interest rate on such deposits. If RBI keeps the current rate as the floor, it will mean banks will be allowed to offer more than 4% to consumers, but not less than this. This will protect consumers. In case a rate war erupts, they will gain.
Also Read Tamal Bandyopadhyay’s earlier columns
Most banks are taking a close look at the savings bank deposit as a product and preparing themselves for the new regime. Such deposits constitute about 22% of the Rs 53.46 trillion deposit portfolio of the Indian banking industry, and if the banks get the freedom to fix rates, the entire dynamics will change.
The quantum of interest rate will depend on two critical parameters—the mode of operation and how much money is kept in a savings account. A consumer who never visits a branch and even an automated teller machine (ATM) and uses only Internet for all transactions, will be offered the maximum interest rate as the transaction cost for net banking is cheaper than ATM and branches. An ATM user will earn more than a branch-goer but less than a consumer who does banking only through the Internet. And since branch banking is most expensive among all channels, those customers who visit bank branches to deposit and withdraw money from savings bank accounts will get the least. The second deciding factor will be the quantum of money kept in a savings bank account. One who keeps Rs 1 lakh will certainly get more interest than another person who keeps Rs 10,000 as banks stand to benefit from higher amount of deposits kept with them. For those who are not keeping enough money in their savings accounts, banks can put restrictions on their use of branches and ATMs, and even the issue of cheques and quarterly account statements to cut cost. Currently such restrictions are imposed only on the so-called zero-balance accounts where customers are not required to keep a minimum balance.
Freeing of savings bank accounts will prompt banks to be innovative on garnering liabilities or resources. Till now, banking innovations in India are mostly restricted to assets. There has hardly been any experiment with deposit products barring floating deposit rates that some banks tried but consumers were not excited. With competition intensifying, the focus has all along been on assets or loans and investment products to woo corporate and even retail customers. The teaser home loan is one such product where a consumer raises money at a relatively cheap rate and pays low interest for the first three years; and, subsequently, the rates go up or down, depending on the prevailing market rates.
The first sign of smart thinking on deposits was seen last week when State Bank of India (SBI) raised its short-term deposit rates by a massive margin. SBI has raised its short-term 7-14 day deposits by as much as 2.25 percentage points to 6.25%. Why did the bank do that?
The logic is quite simple: if it is running short of cash and needs to borrow from RBI, it will have to pay 7.25% for overnight money. So it is paying less to the depositors than what it would have paid to RBI. At the same time, if the bank is unable to deploy the money, it will not take a hit as it can always keep it with RBI and earn 6.25%, the same interest rate that it is paying to the depositors.
How old are you?
Chief executives of Indian banks and financial institutions are spending sleepless nights these days as there’s no clarity on their retirement age. Technically, they are to retire when they turn 60; but the focus now seems to be not on their age but the period of contract. Jobs of chairmen and executive directors in banks and financial institutions are contractual.
So at the end of his five-year stint as chairman of Life Insurance Corp. of India, T.S.Vijayan, 58, was made a managing director. Usha Thorat, former RBI deputy governor, last year did not get another term even though she was not 62, the retirement age of a deputy governor.
Union Bank of India chairman M.V. Nair’s fate is also hanging in the balance. His contractual appointment ended in March, but he is not 60 as yet. For the time being, the government has asked him to continue for three months. One hopes the government does not follow the Vijayan example and direct Nair to go back to Corporation Bank as general manager till he turns 60.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email your comments to firstname.lastname@example.org