Mumbai: The Reserve Bank of India (RBI) on Thursday warned in a discussion paper that deregulation of savings deposit rate may hurt banks’ profitability though it will improve transmission of monetary policy.
Savings deposits that form 22% of banks’ total deposit base are a source of low-cost funds for them, and deregulation may lead to unhealthy competition, thereby pushing up cost of funds of the banking sector.
However, bankers don’t expect the transition to a fully deregulated regime to happen soon and feel that it has to be done in phases.
“The Indian banking system will have to adapt. The banks will have to be more efficient, may be deal in larger volumes. Asset has to be managed efficiently,” said M. Narendra, chairman and managing director of Indian Overseas Bank.
The move will also drive up transaction charges for the consumer, said Chanda Kochhar, chief executive officer and managing director of ICICI Bank.
“Normally, whatever a customer would get in terms of pricing would be a mix of the interest rate and the transaction charges and these two things will balance out,” she said.
The central bank has sought feedback on the discussion paper by 20 May.
Helps policy transmission
On benefits of the deregulation, the RBI said it will aid in monetary policy transmission.
“For transmission of monetary policy to be effective, it is necessary that all rates move in tandem with the policy rates. This process, however, is impeded if the interest rate in any segment is regulated,” the RBI said in the paper.
Savings deposit interest rate cannot be regulated for all times to come when all other interest rates have already been deregulated as it creates distortions in the system, the RBI said in the paper.
Savings deposit rate has remained unchanged at 3.5% since 1 March 2003, even as the policy rates and call rates moved significantly in either direction, the central bank said.
The RBI, citing the experience of deregulating term deposit rates, said it did not result in any large shift of deposits to other banks and therefore concerns of similar shifts while freeing up the savings deposit rate could be mild and not result in significant asset-liability mismatch.
The RBI also said most developed countries have deregulated the savings bank deposit rates.