Till recently the interest on savings account deposits was governed and regulated by the Reserve Bank of India (RBI). Banks had no control whatsoever and a meagre 3.5% on the lowest amount available in the account from the 10th to the end of month was paid out. With the RBI’s recent move to deregulate this interest rate, banks now have a free hand in deciding what they wish to pay to their depositors. Here is a quick snapshot on what this deregulation is and how the move could impact you.
The Deregulation Guidelines
Though the Reserve Bank of India has given banks a free hand to decide the interest rate, certain guidelines have to be adhered to by all banks.
A uniform interest rate is to be maintained on all savings account deposits up to Rs. 1 lakh, irrespective of the amount in the account. This means that all deposits from Re 1 to Rs 1 lakh must be paid the same interest rate.
For all deposits over Rs. 1 Lakh, a differential rate may be offered, provided there is no discrimination in the interest paid between one deposit and another of similar amount, accepted on the same date, at any of its branches.
Deregulation is applicable only to the interest rates on savings accounts of Resident Indians. Interest rate on Non-Resident Accounts will continue to be regulated.
What Does Deregulation mean to Depositors?
As a common man, the deregulation move is definitely going to have an impact on each and every one of us in some way or the other. On the brighter side deregulation would mean:
Ø Higher earnings from saving accounts
With banks having no restriction on the interest rate, the savings account could fetch you better returns. Higher interest makes them more attractive now, with more value for your money.
Ø Short term investment option
Investors looking out for short term investment avenues would now find the savings account a safe haven. High liquidity, better interest and of course the lack of volatility, makes them a good short term investment pick.
With banks already making announcements on revised interest rates, deregulation could also mean:
Ø Increased cost of loans for borrowers
Current account and savings accounts funds are used by banks, to lend to borrowers at higher interest rates. A major portion of the banks income comes from this interest rate difference. Increasing the savings account interest rate would mean banks would need to increase the loan rates too, in order to maintain a decent interest spread. Such hike in loan rates would have to be borne by borrowers.
Ø Increased charges
The additional interest expenses on the savings account borne by the bank may be passed on to customers in the form of charges on transaction or ATM usage.
Deregulation Impact on Banks
Increased costs and decreased profitability
Savings account deposits form a large part of a banks liability. Any increased interest expense on it would bring in additional cost pressures on the bank thereby affecting their profitability. And as mentioned above, such cost pressures could be passed on to borrowers and customers.
Less takers for short term fixed deposits
With a higher interest rate on savings accounts, short term fixed deposits may no longer attract depositors. The savings account would not only offer a high rate of interest, but it would also provide high liquidity.
In the competitive world of retail banking, every bank uses aggressive mechanisms to retain and attract customers. The deregulation move could make savings account interest rate as a decisive factor for customers to opt for a particular bank. Banks would have to offer customers more value for their money, as part of their marketing effort.
Asset and liability of banks
A banks “core” deposits come from its savings accounts (liability). These funds are used by banks to cater to various kind of long term loans (asset). With banks increasing their interest rates, other smaller banks dependent on savings accounts, may lose out their vital core deposits to the one offering a much higher interest rate thereby creating a mismatch between their assets (loans to borrowers) and their liabilities.
Points to Keep in Mind
The deregulation move could bring in a possibility of both an increase as well as a decrease in savings account interest rate. Where competition could force the banks to hike their interest rates, a decrease in rates is also possible in times of a surplus.
Do regular checks of what banks have to offer. It financially makes sense to shift banks only if the interest rate difference is substantial enough.
Before making any shift, check to see what are the charges you would have to pay. Service charges, ATM costs, transaction charges etc… have to be looked into.
Banks offer benefits to their priority customers and to those who have maintained a long standing relationship with the bank. Check to see if you could avail of any benefits from the current banker, before you make a move to a new one.
Written by Ramya Ramachandran
Written by Ramya Ramachandran