New Delhi, April 29: After two unsuccessful attempts in 2002-03 and 2006-07, the Reserve bank of India again on Thursday floated a discussion paper on deregulation of interest rate on saving deposit.
Interest rate on saving deposit, at 3.5 per cent since March 1, 2003 is the only regulated interest rate even as saving deposit constitutes a sizeable portion (about 22 per cent) of total deposits.
While RBI favours deregulation, it points to the fact that deregulation will enhance attractiveness, enable product innovation and facilitate monetary transmission better.
“Regulation of savings deposits interest rate has not only reduced its relative attractiveness but has also adversely affected the transmission of monetary policy. For transmission of monetary policy to be effective, it is necessary that all rates move in tandem with the policy rates,” RBI said.
The banking index on BSE dipped 0.83 per cent even as Sensex dropped 156.67 points, or 0.81 per cent at 19,292.02. Among the banks, Bank of Baroda dropping 5.02 per cent, Kotak Mahindra Bank by 3.71 per cent, IDBI bank by 2.55 per cent and Canara Bank by 2.42 per cent.
Saving bank accounts deposits doubled in four years to Rs 8,96,301 crore at the end of March, 2009 from Rs 4,40,339 crore at the end of March, 2005.
However, on the contrary, it argues that unhealthy competition among banks could see financial exclusion and emergence of complex products. It also foresees a situation where banks can witness risk to asset liability mismatches, an argument hugely contested by banks.
“Savings bank deposits represent short-term savings and withdrawable on demand, a large part of savings deposits is treated as ‘core’ deposits, which together with term deposits have been used by banks to increase their exposure to long-term loans, including infrastructure loans. Any unhealthy competition, arising out of deregulation may have the potential to create asset liability mismatches as some banks with large dependence on savings deposits for financing long-term assets may lose savings deposits to some other banks,” the apex bank argued.
The RBI’s concern mostly related to individual savers being duped into complex product in the name of product innovation and small savers and pensioners being at a disadvantaged position.
There have been instances when borrowers have benefited from interest rate on saving deposit over short-term deposits. The saving depositors were further empowered when RBI asked banks to pay interest rate on saving deposit on a daily basis.
During 2001-2010, saving bank deposits grew by 19.4 per cent as against 16.2 per cent growth in demand deposit and 18.2 per cent growth in term deposit.
However, RBI analysis shows that real savings deposit rate was persistently negative during the period December 2004 – December 2010, barring a brief period of March – September 2009 when WPI inflation itself turned negative.
“Although deregulation of savings deposit interest rate may lead to product innovation, it is also possible that banks introduce some complex products, which may not be so easily understood by savers,” it said, adding there could be occasions, especially when the liquidity is in surplus, when savings deposit interest rates may decline even below the present level. This will affect the income flow to small savers/pensioners.
-Agencies–