Infuse competition

The demand for deregulation of interest rates in the banking sector is not new. It has been debated for long but remains an idea whose time is yet to come, in spite of strong endorsement from various quarters. Assocham, the country’s leading chamber of commerce, has now represented to the finance ministry to actively consider the demand. The industry has always advocated it, but the proposal is of wider public interest. The Reserve Bank has also favoured it but has not been able to make the banks accept the idea. As far back as five years ago the apex bank had said that “in principle deregulation of interest rates is essential for product innovation and price discovery.” But it has not gone beyond this statement.

The RBI prevailed upon the banks last year to calculate interest rates on a daily basis. The banks were unhappy with this even when interest on deposits is calculated on an hourly basis in many other countries. The rates are very low in India and the value of savings gets badly eroded by inflation. How does a below 4 per cent interest rate help when inflation is about 10 per cent? Unshackling of the rates will lead to competition between the banks to offer the best rates to the customers. This will help raise the quantum of savings and will ultimately benefit the banks. Most of the bank deposits are in the form of current accounts and savings accounts. These low-cost funds help the banks to make good profits. But they should try to give better returns to their customers and to earn profits through increasing efficiency and productivity.

Nationalised banks have to play a key role in this as the larger part of the savings in the country are deposited with them because their network and are considered safer than private banks. Most people keep money in savings accounts because there is no safer alternative. If the banks compete on interest rates and attract more deposits, not only will they help themselves, but will be able to serve their customers and the nation better. As the economy keeps growing at a high rate, there is increasing need for funds which can come from higher savings of individuals. Customers are now being made to pay for the lack of dynamism and inefficiency of banks.

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