With the Base Rate system on the lending side now in place effective July 1, the next inevitable round of reform in the Indian Banking space that will impact retail banking customer will be the deregulation of deposit rates on Savings Bank Accounts. The Reserve Bank of India (RBI) has already indicated an intent to move forward on this piece albeit after “adequate debate on the issue”.
The savings bank account rate is now the only administered rate in the Indian Banking system and has been fixed at 3.5% per annum without a change in the last 8 years. Banks, however, are free to fix a rate on deposits greater than Rs. 2,00,000 even today. Prior to April 1, 2010 this rate was applied on the lowest balance in the account of the customer between the 10th and the last day of a given month. A deposit into the account during this period would not earn any interest while any withdrawals would only reduce the interest income as the lowest balance would be taken into account. Given a recent change stipulated be the RBI, this rate is, effective April 1, being applied on a daily basis that should result in a higher interest income for the customers.
The deregulation of this rate is likely to be benefit customers but could also lead to periodic, if not frequent, changes to the rate as it would be governed by market conditions, competitive landscape and most importantly the level of liquidity in the system.
• Banks that want to increase their customer base through Current and Savings Accounts (CASA) in light of increasing competition may end up offering higher rates on savings accounts
• Also, mobilising funds through the savings bank accounts is a cheaper option for banks as compared to bulk or fixed deposits – another reason for a focus on savings account customers with better interest rates. Even though it could be argued that savings accounts may not offer funds that are long term in nature, the fact is that most of these accounts are fairly stable, especially in the non metro, Tier II and Tier III cities.
• However, any benefit to customers will be linked to the conditions prevalent in the market – in scenarios of low liquidity, banks may want to offer higher rates to mobilise funds and in times of high liquidity, the rates may fall.
While it is surely a step in the right direction, it is sure to have an impact on the margins and profitability of banks and a firm grip on the Asset-Liability management for banks would be essential. Perhaps, as part of the ongoing debate prior to the deregulation, the following aspects could be considered:
• Provide a meaningful differentiation between the Current Account and Savings Account – maybe restrict the number of transactions in savings accounts to a reasonable level to ensure some degree of stability of funds mobilised through savings accounts and making it worthwhile for banks to offer slightly higher rates on these accounts.
• In the initial round, provide a floor and a ceiling for the savings account rate to ensure some degree of control while the system gains some experience and stability before a complete deregulation is brought about.
Notwithstanding any of the above, this piece of deregulation has been overdue and is now bound to see the light of day sooner rather than later.