Deregulation of savings bank interest rates: RBI’s move not practical in the present scenario

Giving freedom to banks to fix their own interest rates on saving bank deposits in the present juncture may create more problems for the common man, who may have to face higher service charges and more restrictive practices

The Reserve Bank of India (RBI) has always been known to be like a proverbial mother-in-law, who would not like to pass on the baton to the daughter-in-law in one go, but empower the latter only in small bits and pieces. Because either the RBI does not wish to give away power easily to the banks to decide what is best for them, or does not feel confident that the banks have come of age to take their own decisions.

The present announcement to deregulate savings bank deposit rates is coupled with two conditions, which only show that when the RBI gives up its powers, it does not do so wholeheartedly, but with reservations, despite having all the powers at its command to penalise recalcitrant banks.

The policy announcement firstly says that each bank will have to offer a uniform interest rate on savings bank deposits up to Rs1 lakh, irrespective of the amount in the account within this limit. Secondly, for savings bank deposits over Rs1 lakh, a bank may provide differential rates of interest if it so chooses. However, there should not be any discrimination from customer to customer on interest rate for similar amount of deposit.

This artificial divide created by RBI is contrary to its own avowed objective of financial inclusion, which would have been better served, if this discrimination was not practiced at the instance of the apex bank. The objective of liberalisation would have been best achieved if the RBI had only stated that uniform interest rate should be paid by each bank to its savings bank account holders irrespective of the amount in the account.  
The RBI has only created discrimination between the lower middle class and the upper middle class by allowing the banks to quote differential rates for balances below and above Rs1 lakh.

Obviously, this will, in all probability, result in banks quoting higher rates for depositors keeping balances above Rs1 lakh, which will only serve to pamper the rich to the disadvantage of the middle class. In fact, those keeping balances above Rs1 lakh belong to the category of high net-worth individuals (HNIs), who are better informed about alternate investment opportunities and might keep higher balances only as a stop-gap arrangement, till the excess funds are profitably deployed.

The middle class and the lower middle class on the other hand are those who are ill-informed about the banking practices due to their poor financial literary, which NGOs like Moneylife Foundation, are trying their best to improve by constantly holding free seminars at different centres across the country. It is they who need to be rewarded with a higher interest rate, as they are to be encouraged to keep all their surplus cash with banks, without hoarding them at home. Besides, they are the people who are hardest hit by galloping inflation, which is eating into their savings, and any minor relief like higher returns on their savings bank accounts would have benefitted the largest number of people in our country.  
But the present discrimination encouraged by RBI will only serve to negate this objective.

In short, the steps initiated by RBI by giving freedom to banks to fix their own interest rates on saving bank deposits in the present juncture may create more problems for the common man, who may have to face higher service charges and more restrictive practices expected to be introduced by banks to protect their own profitability, which is likely to be hit due to the higher cost of funds and increasing competition in the marketplace, in the wake of the deregulation of interest rates on savings bank deposits.

It is only to be hoped that the RBI will ensure that the interest of the common man are protected when it comes out with detailed guidelines with regard to this subject, as indicated in the midterm policy review announced on 25th of this month.  
(The author is a banking & financial consultant. He writes for Moneylife under the pen name ‘Gurpur’).

1 decade ago
Till now banks were sitting pretty ,doling out just 4% interest to depositors , and the depositors were having their hands tied behind their backs by the regulation. Now let the banks compete more to give a fair deal to depositors whether poor, middle class or whatever class. But the RBI has to be alert to see that unscrupulous banks do not form cartels to charge exorbitant service charges to all and sundry.
Anil Agashe
1 decade ago
The rates had to be deregulated at some time. No time is right time and all times are right times for such decisions. Not making the decision at all is worse than making it may at the wrong time.
Middle class will never have 1 lakh in savings account and hence will not get higher rate. There is no need to be critical about this. If the money is going to be available for longer periods then only banks will pay higher rates. They also have to manage their ALM.
I am glad that RBI has acted on this after a lot of dithering and in spite of opposition by the banks themselves. When freedom is shunned it is normally shunned by the incompetent the most.
1 decade ago
The war continues among banks on interest rate. After nationalization of banks in 1969, RBI used to decide rate structure for deposits and for lending uniformly applicable for all banks. After adoption of reformation policy in the year 1991, RBI freed lending rates excepting loans upto Rs.2.00 lacs. In the name of competition, banks started rate war to attract high profile customers into their fold. Social banking concept and mass banking approach initiated through nationalization of banks have now become the history. Common men are now neglected for all practical purposes. High profile customers have now become the heroes and bankers now run behind them. Profit making became the priorities. Priority and neglected sector of the society became the last option for government banks as well as private banks. Lending for farmers were slowly transferred to Micro Finance Institute who have gradually started lending at higher rates , even higher than local money lenders. It is also true that in the name of poor, banks open Financial Inclusion branches and open No Frill accounts to give direct credit of various aids and subsidies to real beneficiaries. I am unable to understand how poor people will get satisfaction merely by having a bank account until their real regular income rises.

More or less up to the end of the year 2009, banks offered higher and higher rate of interest to attract bulk deposit in their fold and sanctioned loans at sub BPLR rate. It means banks offered higher rate for deposits and lower rates for advances if there was scope of doing bulk business. In this mad run for target, banks damaged the profitability and almost neglected small depositors and common men who needed small loans for their small businesses. After all it is not father’s money of any CMD of any bank, it is public money. Banks collect major chunk of low cost deposits from retail depositors but finance major chunk of their money at low rate to to big corporate .Banks offer lower rate of interest for big value advances as also big value deposits but charge higher rate on low value lending and low value deposits. Management of banks works for the pleasure of big corporate and indirectly increases their personal wealth through illegal earning. They do not hesitate to dilute lending principles for high value loans but show strict adherences for rules for low value lending. This classic culture adopted by banks have already damaged the fundamentals of banks and due to this reason government of India is forced to infuse additional capital to banks so that they can survive and adhere to stricter Basle norms.

Management of banks appear to remain busy in earning profit by resorting to bulk lending and by imposing irrational service charges like cash deposit charges on small and medium class depositors and borrowers. Banks forget making adequate provisions for pension and reduce provisions for bad asset by concealing bad assets for years together to exhibit higher profit to their mentors, ministers, RBI and government of India. Fraudulent attitude of banks continues till they are exposed by some agency or some honest officer. Banks ignore the main work of monitoring lending done by them and as a result quality of lending deteriorated and monitoring of loans completely stopped in the name of global recession. When the assets become bad they have lame excuses like global recession, rate hike, bad weather, inflation, legal constraints etc. Due to this unhealthy and mischievous mind set of bank officers, amount of gross Non Performing Assets started increasing. Bribe led lending has increased, bribe based write off of loan has increased, vote bank oriented waiver of loan resorted by government has gone up and so on. It adversely affected not only the quality of loans and deposits but also the culture of working bank employees. Officers in particular and employees in general focus on those work where they find scope of earning through illegal money to become richer and richer and for this evil work they indulge in flattery to bosses and ministers to get rid of punitive action.

Banks started opening new and new branches to please ministers and to raise business without improving the quality and quantity of manpower. Unprecedented damage has already been caused particularly to public sector banks and now RBI has added fuel to fire by deregulating savings interest rate. Cost of fund will go on increasing and yield on advances will go on falling down, one due to low lending rate and other due to increasing trend in provisioning due to rising level of NPA as also due to higher coverage ratio.NPA of banks will increase and increase only until drastic actions are taken against top officials who indulge in bribe led lending. Interest war initiated by RBI in the name of competition will spoil the future of Public sector banks and improve the profitability and overall business of private banks. Not only this , if private banks and then public sector banks start offering higher rate of interest on saving deposits, future of post office deposit schemes will also be jeopardized.

Lastly, it is wise to mention here that if big value loans start becoming bad assets due to real recessionary global pressure or due to some natural mishaps or due to some inherent weakness in the project , banks will suffer unprecedented growth in NPA which will eat their capital and create a crisis similar to subprime crisis which erupted in USA and other European countries a few years ago and which is likely to recur in coming days..
Replied to danendra comment 1 decade ago
Very good and painstaking analysis.
Nagesh Kini FCA
1 decade ago
RBI is in deed like the proverbial mother -in-law, she prefers the richer HNI daughter-in-law in showering the goodies of higher rate of interest, at the same time taxes the poorer one on small sums of Interest of Rs.10,000+ credited on their hard earned savings! Blatant case of discrimination and favouratism.
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