Self interest

The focus of the debate on savings bank interest rates has shifted from an idea that is customer-friendly to a problem that might hit the balance sheets of banks, especially those owned by the government. The Reserve Bank of India is in favour of giving the banks the freedom to fix their own interest rates on savings bank deposits.

This is good news from a central bank that is used to exercising tight control over everything under its care. But the RBI’s liberal approach is not acceptable to the banks which have informed it that they would rather have a regulated interest rate regime than the freedom to fix their own rates.  This only shows that the banks care more for their own profits than for the customers’ interests.

The interests rates on deposits are meagre in India. It is reluctantly that the banks agreed this year to calculate interest on a daily basis while in many countries it is done on an hourly basis. The banks oppose a free interest regime because that it will introduce competition and an interest war.

They should actually welcome competition because the bank  which manages its finances   best and offers the best terms and highest interest to customer will perform the best.  Though banks make reasonably good profits, this is because of the availability of cheap funds in the form of low-interest deposits. Many of them are overstaffed, have high operating costs and are burdened by non-performing assets. Decisions taken on extraneous considerations and in violation of good banking norms also hit their bottom lines.

Though banks have prospered after nationalisation and benefited much from the country’s economic growth in the last two decades, they are still in a protected and regulated environment. By competing among themselves they should offer more and better services to their customers.

There is much more room for cutting costs through application of changing technologies and adoption of better practices. Compared to some successful private banks pubic sector banks are still backward. They are rightly considered to be safer than private banks. If this brand strength is supplemented by better practices they can do much better.

Customers should not be made to subsidise the banks’ operations and made to pay for their inefficiency. Higher interest rates for savings accounts will benefit existing customers, draw more people to the banks as customers, increase the national savings rate and will in fact motivate the banks to perform better.

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