The Reserve Bank of India (RBI) is considering freeing up the interest rate on savings bank accounts, which is currently fixed at 3.5% per annum.
Usha Thorat, deputy governor, RBI, said a working group is being set up to weigh the pros and cons of the move.
No time frame has been set to free up rates, Thorat said. But experts said the process could take a couple of months at best if all goes well.
“I think it will happen, it is inevitable,” said Harsh Roongta, CEO of apnapaisa.com, a personal finance advisory.
Leaving the decision of fixing interest rates on banks could drive the rates up or down, depending on the demand and supply of money (for deposits).
Where banks compete to attract more customers due to shortage of funds, interest rates on savings accounts will move up. On the other hand, if banks are flush with funds and havea significant current account savings account (Casa) clients, they will resort to paying less interest rates than 3.5% on savings accounts. “One fear of deregulation is that there will be an interest rate war,” Roongta said.
The more the Casa, the better the profit marginfor banks since they do not pay any interest on current accounts and just 3.5% on savings accounts, whereas they give out loans at interest rates between 9% and 17%, using the same money.
“For banks, it will be a challenge to retain their share of Casa without parting with the interest component,” said OP Bhat, chairman, State Bank of India, But one thing is for sure that people will have more options. “Competition will intensify, so there would be a range of products and sub-products offered by banks,” said Bhat.
Meanwhile, deregulation could also lead to discrimination between clients of the same bank. lowering rates in some geographies while increase in other areas.
“It would need to be ensured that there is no discrimination between different customers of the same bank,” said Thorat while addressing a banking conference organised by Ficci and the Indian Banks Association in Mumbai. But the focus will always remain whether deregulation of savings rates would draw more population into the fold of formal banking system, she added.
Whether transparency in arriving at the savings rate will be helpful or not, is what the working group will look into. “Before going for deregulation of savings rate we need a complete awareness programme for the entire country. We need to inform the customers what is the mechanism used to arrive at the savings rate,” said a senior official in a public sector bank.
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