RBI may free up savings rates

The RBI on Thursday released a discussion paper that suggested rates on savings deposits could be de-regulated to benefit savers who could gain from competition between banks. HT reports. A tectonic shift for household savings
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Updated on Apr 28, 2011 11:38 PM IST
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Hindustan Times | By HT Correspondent, Mumbai

Your savings bank accounts may fetch higher returns if a proposal by the Reserve Bank of India to free up controls on the accounts is implemented. But there are question marks over whether it would make competition between banks unhealthy.

Savings bank accounts now fetch a regulated rate of 3.5% per year, while term deposits often fetch at least twice that much. The RBI on Thursday released a discussion paper that suggested rates on savings deposits could be de-regulated to benefit savers who could gain from competition between banks. However, the paper, which has been put up for feedback and suggestions from stakeholders, added this could hurt the profitability of banks.

A free market in savings bank interest could result in banks that have low current and savings accounts (CASA) deposits offering higher rates to attract households that account for more than 80% of savings deposits with banks.

"Market based rate of interest on this product has the potential to attract large savings from low-income households. Deregulation will also allow banks to introduce product innovations, which could also benefit the depositors," said the paper.

The paper, however, noted that banks have raised their concerns on deregulation as savings deposits have been a source of cheap funds for them and their deregulation may lead to unhealthy competition that may see the shift of deposits away from some banks.

But the RBI’s paper added that an analysis of interest rates suggested that deregulation of term deposits did not result in unhealthy competition and hence savings deposits may not suffer either. Bankers say a rise in interest rates will also lead to a rise in the transaction charges for the customers.

“The move will drive up the transaction charges for the consumers. Normally, whatever a customer would get in terms of pricing would be a mix of the interest rate and the transaction charges and these two things will balance out,” said Chanda Kochhar, managing director of ICICI Bank.

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Thursday, October 28, 2021