It’s time to unshackle savings rate: SS Tarapore

The Reserve Bank of India (RBI) should soon deregulate the savings bank deposit rate, according to three former deputy governors of the RBI. The RBI in April has already released a discussion paper on this subject. It is believed that if deregulated, the customer will benefit.

“There is a tilt towards deregulation. In my view, the deregulation should be initiated now, in the first half of the current financial year, and initially the rates should be prescribed in a range say between 4% and 5%,” said SS Tarapore, former deputy governor, RBI. According to Tarapore, these rates should be uniformly applied to all the depositors of the bank and no discrimination should be allowed.

Currently, money lying in savings bank account fetches 4%. According to the RBI’s former deputy governor Kishori Udeshi, deregulation of savings bank deposit rate will encourage the savings habit in a household, strengthen financial inclusion and provide protection of depositors.

“For decades, the depositor has been getting a negative rate of return on his savings bank account. With deregulation, he may still get a negative return, but competition will ensure that the return will be better than today,” said Udeshi.

Udeshi also said that the deregulation of savings rate, coupled with technology, may lead to product innovations for banks. “Since we are yet to make progress towards financial literacy, the RBI must, in the interest of protection of depositors, regulate the introduction of new financial products. At least in the first few years of deregulation, the RBI must be in the loop,” said Udeshi.

Usha Thorat, another former deputy governor of RBI suggested that the savings bank deposit rate has to be the same, wherever the savings bank account is open with the particular bank. “The same bank should give the same rate, irrespective of location of depositors or size of minimum balance. In this case, most categories of savers will actually gain,” said Thorat.

The issue of deregulation of the savings bank interest rate was examined by the RBI several times since 1996-97, but not considered for implementation because it was felt that the time was not right.

According to Thorat, there are 555 million savings bank accounts in the country. If deregulation happens, then rates would go up because rates are kept artificially low. “Increase in the rates cannot be attributed to unhealthy competition over time, because the system will adjust. In fact, competition in this area is actually good for the system,” said Thorat.