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ShareGiven the changes in policy rates and reserve ratios frequently effected by the Reserve Bank of India (RBI) over the past six months or so, no major initiative was expected -- and none was forthcoming -- in the monetary stance for 2009-10.
The central bank has ruefully admitted that it has done all it could in regard to the transition to a softer interest rate regime, but banks have been less than forthcoming for reasons of their own.
The response to cuts in repo and reverse repo rates may, at best, be token reductions in deposit and lending rates -- and certainly not to the extent warranted by the fall in the inflation rate or sought by industry and trade.
However, the credit policy has something to bring cheer to the common man. The proposal to pay interest on the savings bank deposits on a daily basis from the next fiscal has at last found favour with the RBI. It's a good move no doubt, considering how this class of depositors has received a short shrift all along. But, couldn't the central bank have done more?
The interest rate on the savings deposits has remained frozen at 3.5%, when the inflation rate had soared high and now when it is on a downward path and while the term deposit rates have been changed often.
In a sense, the status quo in this respect meant that, for millions of holders of this type of deposits -- 72% of the total number of accounts with commercial banks, of which an overwhelming majority is households -- have been treated rather unfairly in the matter.
Moreover, the method of working out the interest rate, which is based on the minimum balance between the tenth and the last day of the month, meant that the effective rate is much lower than 3.5%.
A reform is thus overdue in this area; but what the RBI has done is not enough. This is especially so when the issue is seen in context. Seven years ago, in its credit policy statement for 2002-03, the apex bank said, "in view of the present deregulated interest rate environment... there is an apparent need for deregulation of interest rates on SB rates also."
This position was more or less reiterated in the 2006-07 policy as well, when RBI stated that while the current situation had warranted the status quo, it recognised the need for "deregulation of this interest rate" for product innovation and price discovery in the long run.
Thus, the question is not whether, but when the banks will be given freedom to fix the interest rates on savings accounts on their own --- the only type of deposit on which the RBI fiat holds sway.
Isn't the time ripe now for such a move?
In principle, the central bank has made its position clear. Banks, especially public sector banks, may be averse since savings deposits constitute a cheap source of funds for them. But what about the interests of the millions, many of whom are individuals with limited means and residing in small towns and villages and familiar with this type of accounts only?
They have been dealt a raw deal both in regard to interest rate and in the manner of its calculation. They deserve better. Though the cost to banks may go up, the customer is the beneficiary. Also, banks can cushion the impact by suitably fixing the interest rates for their 15-day, 30-day and 46-day deposits.
RBI has made a right move in advising the transition to the calculation of interest on savings bank account on a daily product basis and the time span of one year is designed to enable banks to be technologically ready for this change over. Yet, there is some question about the hesitancy on the part of the central bank to go the whole hog. It could have stated that, from the next fiscal, banks will have the freedom to fix interest rates on saving bank deposits.
If this total break with the past is not possible in one go, it could have set a floor rate and let banks compete for this type of deposits.
But, better a half-reform than no reform at all.
