RBI eyes deregulation of interest rate on savings accounts
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The RBI is keen to deregulate the interest rate on savings bank accounts and complete the marketisation of banking. But the banks which generally support deregulation insist that the RBI continue with control. What they are worried about is that deregulation would plug their cheapest source of funds.
Interest rates, whether on deposits or on credit, were deregulated as part of the reform process. Consequently, rates dropped dramatically and became a strong incentive for consumption, investment and growth. The only rate that is still governed by the RBI is the rate on savings deposits, apart from the policy rates like the repo rate or the bank rate.
The rate as also the method of calculation of interest payment on savings deposits had benefitted the banks unduly. It was only in April 2010, after about seven years of indifference, that the RBI gave some thought to the undue advantage the banks enjoyed with the low rate of interest and the wrong method of calculation. With the change, the savings deposit became more like short term lending by the depositor to the bank.
The interest on savings deposits is now calculated on daily basis on the outstanding amount. As such, the rate of interest on savings deposit must have some relationship with the interest short-term loans like treasury bill rate or call money rate like mibor.
In April last year, the rate of interest on savings account was raised from 3.5 to 4 percent. Since then it has been static while all other rates have zoomed up. In the last one year, the interest on 91 day treasury bills jumped 300 bps, repo market rate 200 bps and mibor 180 bps.
Obviously, with no change in the rate, savings deposits have become the cheapest source of funds which give banks the maximum spread. At the present base rate the spread is now 600 bps.
Savings deposits are over 23 percent of the total bank deposits. A 0.5 percent increase in interest rate would raise the interest cost for banks by 6,000 crore rupees. That is, in fact, the loss that the depositors in savings accounts suffer. What is relevant, nearly 70 percent of the savings depositors are individuals.
Surely, as a deposit with cheque facility, savings account has advantage over other money market loans. But that facility is not such that in spite of the steep increase in other rates and the sharp rise in inflation, interest on savings account should remain static. With inflation at over 9 percent the depositor in savings account is losing the real value of his money at the rate of 5 percent per year.
It stands to reason that the RBI should complete the deregulation process and let every interest rate (except the policy rates), be market driven. Even if banks insist on bank charges to make up for the change in the character of savings account, the depositors will be better compensated for inflation.