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Deregulation of savings rate to benefit depositors: Bankers

business Updated: Jun 20, 2010 13:27 IST

Bank depositors are likely to benefit from deregulation of the interest rate on savings accounts, an idea mooted by the RBI recently.

"The benefit to customers would be market-linked. Once it is deregulated, it would depend on liquidity position in the market," Indian Bank CMD T M Bhasin said.

Since banks have now moved to daily calculation of interest rates, interest rates can be paid depending on the prevailing liquidity situation and the call money rate and reverse repo rate, he said.

Presently, the savings rate is fixed at 3.5 per cent and is calculated on a daily basis from April 1. However, banks can fix the rate on deposits over Rs 2 lakh even today.

It is to be noted that from next month onward, banks will switch to the new lending rate mechanism of base rate, replacing the existing Benchmark Prime Lending Rate (BPLR).

According to another banker, the rate could go up, as banks with low CASA (Current Account and Savings Account) would try to attract depositors by offering higher rates.

This could result in flight of CASA from higher to lower ratio banks, he said on condition of anonymity.

Mobilising CASA is a cheaper way of raising resources compared to fixed deposits and bulk deposits. The higher the CASA, the lower the cost of funds for the bank.

The issue assumes significance following RBI Governor D Subbarao favouring deregulation of interest rates on savings accounts as part of financial sector reforms.

"Deregulation of interest rates (including savings rates) is an important way forward for reforms. The base rate system that would come in to affect from July 1 is also an important reform method," he had said last week. The concerns expressed by banks on the issue should be debated, he had said.

Central Bank of India CMD S Sridhar said, "I think base rate mechanism should stabilise because it is a new thing. If not handled properly, it can be disruptive also."

Once the lending rate scenario stabilises, banks can then think of deregulation of savings rates, Sridhar said.

"Deregulated saving bank rates will obviously be linked to the liquidity situation. So, there is a possibility of banks tweaking them in tune with changing circumstances," Corporation Bank Executive Director Asit Pal said.

Last week, even RBI Deputy Governor K C Chakrabarty had said, "We are in favour of deregulating all interest rates, including savings rate."

"We have initiated a debate in the last policy... the deduction is very clear, clear in favour of deregulating all interest rates, including savings banks. But the decision will be taken, when to do that, after having adequate debate on the issue," Chakrabarty had said.