RBI to let banks fix savings bank interest rates

It will help in product innovations which will benefit the depositors

RBI to let banks fix savings bank interest rates

In a discussion paper released on its website seeking feedback from the general public on the issue, RBI said deregulation of savings deposit interest rates has both pros and cons.  At the same time, RBI said: Savings deposit interest rate cannot be regulated for all times to come when all other interest rates have already been deregulated as it creates distortions in the system.

Currently, banks pay interest at the rate of 3.5 per cent on saving accounts, which was fixed in 2003. Even as RBI deregulated the interest rates on fixed deposit schemes in 1997, it continues to fix the rate on savings deposits.

Further, RBI said international experience suggests that in most of the countries, interest rates on savings bank accounts are set by the commercial banks based on market interest rates. The banking regulator also pointed out that most countries in Asia experimented with interest rate deregulation to support overall development and growth policies. These resulted in positive real interest rates, which in turn contributed to an increase in financial savings, RBI said adding: “Deregulation will also allow banks to introduce product innovations which could also benefit the depositors.”

The apprehensions over the move — of deregulating savings bank interest rate — would lead to “unhealthy” competition among the banks are unfounded, the paper said while pointing out that deregulation of fixed deposit rates did not result in unhealthy competition among the banks. “Deregulation of savings deposit rate may also not result in any unhealthy competition,” it added.

Deregulation of the interest rate on savings deposit will make the rate flexible along with other interest rates, depending on the market conditions, RBI said. As savings bank deposits in rural, semi-urban and urban areas are held largely for savings purposes, deregulation of interest rates is likely to enhance its attractiveness in these areas, it said.

It may be noted that savings deposits are an important component of bank deposits whose average annual growth -- though decelerated in the 1990s as compared with that of the 1980s — accelerated sharply in the decade of the 2000s.

Savings account penetration via number of savings accounts for 100 persons, which remained broadly unchanged between March 1996 and March 2005, increased significantly by March 2009.

Per capita savings bank deposits also increased from Rs 1,067 in March 1996 to Rs 7,767 for March 2009.  However, in recent years, the growth in per capita savings deposits was lower than that of aggregate deposits as reflected in the decline in the ratio of per capita savings deposits and per capita aggregate deposits.

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