RBI may free interest rate on savings account

Working group to list out modalities

RBI may free interest rate on savings account

RBI Deputy Governor Usha Thorat and Boston Consulting Group Partner & Director, Duncan Martin,  during a conference of 'Global Banking: Paradigm Shift' in Mumbai on Wednesday. PTI

Addressing on the second day of the 3-day banking conference organized by Indian Banking Association and Ficci here, RBI Deputy Governor Usha Thorat said “Deregulation of interest rate is on our radar. A working group will soon be set up to examine the possibility of deregulating of interest rates.” 

At 3.5 per cent a year, interest on savings accounts is the only regulated rate in the domestic banking system currently.  “Given the level of interest rates on bank deposits, common people are often lured by higher interest rates provided by alternative channels in the informal market,” said Thorat.

Thorat pointed out that one of the drivers of growth in India has been the high level of savings. “Savings rate is 32.5 per cent of GDP today (2008-09) compared to 22.3 per cent ten years ago (1998-99),” she said adding that the contribution of the household sector to savings is 70.0 per cent.

While the overall savings ratio has increased significantly, she said financial savings has remained at around 50 per cent of household savings. Within financial savings, share of bank deposits has increased from 33 per cent in 2000-01 to 55 per cent in 2008-09.  In March 2004, there were 59 savings and current accounts per 100 adult population – in March 2009, the number has risen to 96. This reflects the impact of increasing banking penetration although there is a long way to go in many regions, she said. Achieving higher rates of growth would call for higher financial savings and this in turn implies much greater penetration of banks and other financial intermediaries like insurance companies, mutual funds and pension funds.  

Thorat said for achieving the goal of financial inclusion, there is a need for a higher number of tie-ups between banks and the non-bank finance companies (NBFCs) to have better delivery systems to ensure better last mile connectivity.  Currently, she continued, the RBI is in the process of “tweaking” regulations on securitization to ensure the growth of the securitized market in an orderly manner.

RBI Deputy Governor  also highlighted the need for development finance institutions to launch more risk mitigant like the the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) which offers collateral-free loans for the benefit of small farmers, landless agricultural labourers, those engaged in allied activities related to agriculture and ones affected by natural calamities.

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