Savings A/C Interest Rate Deregulation : Pros and Cons ?

Posted in Finance Articles, Total Reads: 9647 , Published on 02 May 2011
Advertisements

RBI has set the ball rolling and has made the pitch for the deregulation of saving bank deposit rates.While the central bank has deregulated the interest rates on fixed deposit schemes 14 years back, they are yet to do so on savings bank deposits.the interest rate on saving bank deposits has remained constant at 3.5% since 2003.Now RBI has made a move in this direction to deregulate the interest rate on saving bank deposits.The idea behind such a move is that RBI considers it would benefit everyone in the banking environment.The savers would be benefited by higher rate of interest and the lenders would have to come up with innovative products to attract low cost funds.

 

Interest Rates Deregulation

The banks which would benefited from the deregulation are the oneshaving fairly low portion of CASA deposits. However majority of the bankers are of the view that it may not necessarily be beneficial for

the savers. They point out that since Saving bank deposits are basically ones wherein the customers can withdraw money on demand, the banks would suggest a higher minimum balance to balance out the transaction costs involved. Now to understand the product better we need to know what the pros/cons are for this product which are as

listed below.

 

Pros

1) Enhance attractiveness of savings deposits : Regulation of interest rates imparts rigidity of instrument/product and as interest rates are not changed in response to changing market conditions the product loses it sheen.This has primarily affected the saving bank deposits.So deregulating the interest rates would help in enhancing the attractiveness of this product.

3) May lead to product innovations : Saving Bank deposits constitute 22% of total deposits.Since there is regulation in this space, there is hardly any scope for innovations.Both the banks and customers are mere spectators.So deregulating would result in more innovations in terms of products in this space.

 

Cons

1) Unhealthy competition : Saving bank deposits form a major chunk of CASA deposits for banks. So the lure of attracting more saving bank deposits would result in banks acting irrationally. If not handled properly this would result in unhealthy competition among the banks in the long term.

2) Risk of asset liability mismatch : Saving bank deposits are basically short term savings and are withdrawable on demand. In case of deregulation it could result in asset liability mismatch for the banks.the end result would be ultimately bank credit for customers would be difficult to come by.

3) Could affect small savers/ pensioners : There are people who depend on interest rate as a source of income.Currently they are receiving a fixed rate on saving bank deposits but in the future after deregulation if there is excess liquidity in the system the interest rate would fall to a level much below than the current rate adversely affecting this group

Primarily the deregulation is being pushed for by the smaller/newer banks as compared to older/bigger banks. These small banks have small percentage of CASA deposits and in the current scenario attracting Saving bank deposits is not easy. The reason being since the savers don't find any difference to shift to newer banks, they would still continue to their existing bank than shifting to a newer one. With this deregulation they could innovate in this space and attract a higher percentage of Saving bank deposits.

Internationally many countries especially developed ones and those having high inflation rates have deregulated interest rates and the experiences have been fairly satisfactory.So buoyed by this data there have been a section of people in our country who are pushing for the same.What would be the result of such an idea in our country only time will tell.

 


Advertisements


If you are interested in writing articles for us, Submit Here